Should Students Pay the Same Interest Rate as Goldman Sachs?

Sen. Elizabeth Warren in Washington, DC Photograph by Melanie Stetson Freeman/The Christian Science Monitor via Getty Images

You may have read about the growing student loan bubble or about the spike in interest rates due to arrive in July if Congress doesn’t intervene—the rate on federally subsidized Stafford loans will double from 3.4 percent to 6.8 percent. That will hit an estimated 7 million students.

Easing this burden is the goal of a new bill introduced by Democratic Senator Elizabeth Warren of Massachusetts, her first. Warren proposes to cut, rather than raise or simply maintain, student interest rates, and she’s devised a particularly resonant way of framing her idea: She thinks students ought to be entitled to the same interest rate that big banks get when they borrow from the Federal Reserve. Currently that rate is 0.75 percent.

“If the Federal Reserve can float trillions of dollars to large financial institutions at low interest rates to grow the economy,” Warren said during a Senate speech Wednesday, “surely they can float the Department of Education the money to fund our students, keep us competitive, and grow our middle class.”

What effect might this have on families’ bottom lines? A big one. According to the Consumer Financial Protection Bureau, student loan debt has eclipsed credit-card debt and now stands at more than $1 trillion. As Bloomberg reported yesterday, a group of advisers to the Federal Reserve recently warned that student loan debt has “parallels to the housing crisis.”

Warren’s goal is twofold. In the near term, she wants to head off the blow to middle-class pocketbooks that an interest rate spike would inflict. There’s probably bipartisan support for this, but perhaps not at the low rate Warren proposes or through the vehicle of the Fed. Last July, Congress voted to extend the lower rates for a year, and lawmakers may renew that extension once again—though, as with everything else, they’ll probably wait until the very last moment.

Warren’s broader purpose here is to highlight the enormous advantages and preferences that the federal government bestows upon the largest banks, not simply as a way of fostering popular sentiment to break them up (although she wouldn’t mind), but because the contrast with what the government does (or doesn’t do) for students and their families is, by comparison, a damning one. And that makes it politically effective.

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