Warren was discussing the first bill she has introduced in the Senate, a plan released on Wednesday to address the crisis of outstanding student debt – which topped $1 trillion this year, with over 37 million Americans owing thousands of dollars in higher education costs that could take decades to pay back.
Student debt is now the second-highest form of debt in America – behind only mortgage debt – with the number of borrowers and the average balance increasing 70 percent since 2004. Research from the New York Federal Reserve Board indicates that this has begun to have an impact on the broader economy, with young people burdened by student debt more reluctant to take out auto or home loans. And without congressional action, this will get worse: on July 1, interest rates on federally subsidized Stafford student loans will double, from 3.4 percent to 6.8 percent. This will effectively raise costs for 8 million student borrowers by $1,000.
President Obama’s budget proposal would set subsidized student loan rates at 1 percent above the interest rate it costs the Treasury Department to borrow money for the U.S. government. But a variable rate without a cap would come back to haunt students when interest rates rise again. Another proposal would simply freeze the current rate of 3.4 percent, and would institute a plan limiting payment to 10 percent of income over a 10-year period.
Warren’s plan takes it a step further. For the next year, she would reduce the subsidized student loan interest rate to the same rate that America’s largest banks pay to borrow money from the Federal Reserve at the “discount window.” Currently, banks pay a minimal 0.75 percent to borrow from the Fed, one-ninth the rate that students would pay if Congress fails to act by July 1. Under the plan, the Federal Reserve would give the Department of Education the funds necessary to equalize those rates.
Warren introduced the legislation in a Senate floor speech Wednesday morning.
This one-year stopgap, while Congress works on a permanent solution, would solve several problems. In the near term, it would save money for students, perhaps relieving some of the burden that has led them to scale back their purchases and threaten overall economic growth. In addition, the Federal Reserve has a stated policy of lowering interest rates to spur economic activity, known as quantitative easing, but they have had difficulty extending the benefits of QE beyond Wall Street and the wealthy. Fed Chairman Ben Bernanke admitted as much last February, noting in a speech that while QE has helped housing and stock markets, difficulty in obtaining mortgage credit has meant that “the strong actions taken by the Federal Reserve … have had less effect on the housing sector and overall economic activity than they otherwise would have had.” If the Fed is looking for ways for Main Street to benefit from cheaper borrowing rates, they could hardly endorse a more appropriate policy than lowering student loan interest rates in the short term to what they give out to big banks.
by David Dayden, Salon | Read more:
Image: AP/Cliff Owen
