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Treat Students Like Banks

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In June, high school seniors across the nation will pull on their graduation robes and take pictures with proud parents, celebrating the end of high school and looking forward to a new beginning in college. But on July 1, they will get an unpleasant graduation gift from the federal government: the interest rate on new subsidized student loans will double from 3.4 to 6.8 percent.

These students and their families have worked hard, saved what they could and borrowed what they need to pay for higher education. Rather than reward their efforts, the government plans to add to their burden. Students are already drowning in debt. With $1 trillion in outstanding student loans and many borrowers struggling to stay afloat, we cannot afford to let this happen.

When our students go on to higher education, it helps us all. No state knows that better than Massachusetts. We have the nation’s highest percentage of adults with postsecondary degrees, and our highly skilled workforce attracts businesses from out of state and provides the raw material to launch new businesses in state.  Our highly skilled workforce is helping our economy grow and recover faster than other states, which is why it is so important to help our students get a good education.

Some people say that we can’t afford low interest rates for students. But the federal government offers far lower rates on loans every single day — they just don’t do it for everyone. Right now, a bank can get a loan through the Federal Reserve discount window at a rate of less than one percent. The same big banks that destroyed millions of jobs and broke our economy can borrow at about 0.75 percent, while our students will be paying nine times as much as of July 1.

This is not fair. And it’s not necessary, either. The federal government makes 36 cents on every dollar it lends to students. Just last week, the Congressional Budget Office announced that the government will make $51 billion on the student loans it issued this year — more than the annual profit of any Fortune 500 company, and about five times Google’s yearly earnings. We should not be profiting from students who are drowning in debt while we are giving great deals to big banks.

That’s why we introduced the Bank on Students Loan Fairness Act. The bill gives students the same deal that we give to the big banks by allowing those who are eligible for federally subsidized Stafford loans to borrow at the same rate offered to banks through the Federal Reserve discount window. For one year, the Federal Reserve would make funds available to the Department of Education to make these loans to our students. This would give students relief from high interest rates while giving Congress time to find a long-term solution.

Fixing the interest rate on new subsidized loans is only a first step in helping students who are drowning in debt. We must ensure that the interest rates on all student loans are as low as possible, and that struggling borrowers have options to help them avoid default. Congress will have the opportunity to address these issues next year when it reauthorizes the Higher Education Act. We will work with our colleagues to make student loans a fair deal for students rather than a profit center for the federal government.

Economists explain that banks need low rates because their stability is essential to our shaky economic recovery. But students are just as important as banks to a strong recovery. High levels of student debt pose a risk to our economy if students cannot pay it back. If the Federal Reserve can lend trillions to financial institutions at low rates to grow the economy, surely it can float the money that will keep student loan payments low, keep us competitive and grow our middle class.

Unlike big banks, students do not have armies of lobbyists and lawyers. They’re banking on us to do what’s right. Let’s bank on students by investing in their futures and giving them a break on student loan interest.

Senator Elizabeth Warren and Congressman John Tierney are co-sponsors of the Bank on Students Loan Fairness Act. This piece was first published in The Boston Globe

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  • MariaM
  • UpStateJohn

    Does this idea extend to former students that still carry debt from college? I am in year 14 of paying down graduate school. Will this lower my rate and the rate of those like me who, at middle age, are still “deferring” our middle class dreams due to a high interest rate?

  • Reddoor2

    Banks are exercising vulture capitalism at it’s worst-just as profit health care profits from the desperation of illness, banks and Universities are profiting up front from the students labor, their industry and their intelligence, in the form of student loan interest. It all but ensures that there will be little profit left FOR the students after the banks take their cut as compounded interest=regardless of the job market. Interesting way to ensure that students are driven away from “less profitable” fields of research, archeology, philosophy, or any of the humanities ensure the demise of our great liberal arts educational programs-the same programs that educated our founding fathers.

  • Alan

    I agree- This solution is the only one of those proposed here that will
    erase (if not solve) the problem. However, the proposals offered up
    here are woefully incomplete.

    Having devoted myself to this
    problem since 2005(full time since 2008), my research (which has been
    validated by numerous journalists, and noted experts) has led me to
    conclude very strongly that in the current political environment, there
    is one clear solution that does actually fix (not erase) the problem:
    Returning, at a minimum, standard bankruptcy protections.

    It is
    actually the ONLY solution that both offers deserved, rational relief to
    borrowers AND corrects terminal flaws introduced into the higher
    education financing system years ago- flaws that have propogated and
    festered systemwide, and which are responsible for the unchecked
    inflation, horrible/absent oversight, high default rates, and other
    problems that now threaten the stability of the entire system.

    documentary project is, no offense intended, woefully incomplete having
    neglected to include this solution among the candidates.

    leaked Sallie Mae memo listed bankruptcy (and keeping it gone) as #2 on
    its list of corporate priorities. So to see this missing from this PBS
    production is very, very disappointing and a bit unsettling, frankly.

    do hope that in the interests of the integrity of this production
    effort, and the public interest that the PAT staff is listening and
    might be open to including a 5th essay.

    Alan Collinge

  • Deb Carey

    I like this idea very very much and I thank John and Elizabeth for proposing it! Let’s make it a law.

  • Anonymous

    Yes, treat the students like banks, and then when they break the law or default on their loans we can just give them a slap on the wrist and let ’em go with a small fine … just like the banks.

  • Alan

    For the record, In my comment above, the first paragraph should be deleted. (This was meant for the previous essay).

  • moderator

    Hi Alan. I think I was able to change the comment for you. Let me know if that did the trick.

    Sean @ Moyers

  • Ryan

    Lowering interest does very little if anything to my situation. I am 50 owe around 210,000 anf after 25 years of payments, provided things go well. I will be between seventy or eighty when i wont have to make a 500 dollar a month payment (IBR) plan iam not eligble for pay as you earn. I am completly ‘underwater’ and can not declare bankruptcy. Its very sad while i love school biggest mistake i made . While the effort to do something is appreciated this kind of middle of the road comprimise has lead to the current problem. In my humble opinion the only two suugestions would be to discontinue student loans and allow grant money. Due like other countries two years of military service or volunteer service for two years for free college education. The second suggestion is to restore full bankruptcy and full credit protection for existing loans .

  • JoanneR

    I agree, and I’m also interested in the larger question of reinventing education and civic responsibility. How can we best utilize technology to lower the cost of education? Perhaps the government could require transferable credit for core courses offered for free/low cost online. Perhaps one of those core courses could be about managing finances. I’m liberal, but am concerned when I read about people taking out loans of hundreds of thousands of dollars they know they cannot afford to pay back — for houses, education, or anything else.

  • Roland Buck

    “That’s why we introduced the Bank on Students Loan Fairness Act. The bill gives students the same deal that we give to the big banks by allowing those who are eligible for federally subsidized Stafford loans to borrow at the same rate offered to banks through the Federal Reserve discount window. ”
    THIS IS TOTALLY MISLEADING! The ONLY loans the Federal Reserve currently makes are very short-term loans, mostly overnight, to help banks with short-term liquidity problems. Except for that the Fed does not make any loans to anybody, not the banks, not corporations, not even the government. It does not make the long-term loans that students need. In addition, these loans have to be fully backed by collateral in the form of high quality marketable securities, so that if a bank defaults, the Fed gets the securities and does not suffer a loss. Students are not in a position to back their loans with such collateral. Finally, the 0.75% the Fed charges the banks is a PENALTY rate above the market rate for such very short-term loans. Banks that do not have any problems can get the same kinds of loans from other banks at a lower rate.
    There are very good arguments why student loan rates should not go up and should actually go down, but this is not one of them.

  • Alan

    Perfect. Thanks, Sean-