Elizabeth Warren's (Rhetorical) Discount Window for Student LoansBy
Time is ticking down to July 1, when the interest rates on subsidized student loans will double to 6.8 percent unless Congress Acts. Obama and the House GOP want to tie student loan interest rates closer to market rates (though they have different ways of doing so), but Senator Elizabeth Warren (D-Mass.) has been pushing a bill—her very first bill, in fact—to let students borrow from the Federal Reserve at the same rate it lends to Wall Street, which currently is 0.74 percent.
Tonight Warren’s holding an “emergency online briefing” with MoveOn.org, looking to harness the enthusiasm of the almost 439,000 people who signed MoveOn’s petition to support the legislation. When she made the proposal in early May, our own Josh Green explained that the bill will be effective—not as a piece of legislation that has a real chance in passing, but as a “damning” way to contrast the aid to banks “with what the government does (or doesn’t do) for students and their families.”
The reason it doesn’t stand a chance comes from the rhetorically unsexy technical differences between student loans and the way banks borrow from the Fed, which makes short-term loans to help banks bridge temporary shortfalls in cash. The loans are typically made and paid back over one night and are always secured by collateral the Fed could take if the bank were to default. During the financial crisis, the Fed used the discount window as a lifeline to banks struggling to stay afloat. (In one week during October 2008, the Fed lent out a staggering $111 billion to banks via the discount window.)
Student loans, by contrast, are typically paid back over 10 years. They’re also unsecured, meaning that there aren’t assets the Fed could take back if a borrower defaults. Both of these facts—being longer term and unsecured—make the loans riskier than the overnight, secured loans the Fed makes to banks. And riskier loans typically charge higher interest rates. (The one unusual protection for lenders, though, is that student loans are very difficult to discharge through bankruptcy.) These differences are no doubt not lost on Warren, an expert on consumer finance who has literally written books about secured credit.
Warren’s bill (pdf) proposes the change for just one year—so even if it were to pass, it wouldn’t be a permanent fix. She says it was designed to provide relief while Congress finds a solution, and tonight’s briefing with MoveOn shows how the bill can be a tool to galvanize people around the issue as July 1 draws ever closer.