Elizabeth Warren: Student Loans Should Have Same Rate Big Banks Get

[kpete]

Source: Huffington Post

WASHINGTON -- Sen. Elizabeth Warren (D-Mass.) unveiled her first bill Wednesday, designed to set student loan interest rates at the same level the Federal Reserve offers to big banks.

With some student loan rates set to double on July 1 -- from 3.4 percent to 6.8 percent -- Warren's bill would reduce student loan interest rates to 0.75 percent, opening the Fed's discount window to students.

"Every single day, this country invests in big banks by lending them money at near-zero rates," Warren told The Huffington Post. "We should make the same kind of investment lending money to students, who are trying to get an education."

The freshman senator said she plans to mobilize students -- those most affected by student loans -- to help get the bill through the Senate. "This is about their lives and if they are active in this fight, we can make this change," Warren said.

Read more: http://www.huffingtonpost.com/2013/05/08/elizabeth-warren-student-loans_n_3240407.html

[Paulie]

1. Hear hear

[onehandle]

2. College should be free. The 1% should be taxed to pay for it.

Pay up. Or 1789.

[LuvNewcastle]

3. +1000

[DotGone]

4. Viva la Revolucion!

[Politicub]

8. There is no better return on investment for our country

Than education.

[Ash_F]

5. Doing her job.

[kelliekat44]

6. We need to do all that we can to help her get this bill passed. Obama...get out there and jaw!!! n

[treestar]

9. LOL I knew it was going to be Obama's problem

Elizabeth only has to think up demands, right? Doesn't have to do anything to get the Senate to vote for it.

[Politicub]

7. OFA needs to be pushing this, too

It's a winning issue for dems.

[okaawhatever]

10. Let's wait to tell the students until all the repubs have a chance to come out against it. Gotta

make sure they get on record so they can't pretend they would have done it anyway. I'm sure they call students paying more than banks the liberal elite tax. Guess what? the liberal elites are getting the friends and Koch family discount beeaattcchhh.

[bhikkhu]

11. That would actually make very good sense

as previous legislation has made it difficult to impossible for student loans to be discharged through bankruptcy, they should be much more secure than even home loans.

More secure means lower risk to the lender, lower risk means lower interest rates - in a fair market.

My own student loans were consolidated at 4.8% interest before the last scare about rising interest rates. I would have saved money by not consolidating, but I fell for the scam, more or less. At least the sum isn't especially large, and I was able to pay off a good chunk of it when I refi'd my house last year.

Let's hope Warren's idea gains some traction, as it would make a big difference to a lot of people who could really use the hand.

[Yo_Mama]

12. You can't get blood from a stone

http://ifap.ed.gov/eannouncements/attachments/CDRlifetimerate2011attach2.pdf

Default rates are very high, so loss rates are going to be high. A lot of students aren't in default but aren't even making payments on their loans sufficient to meet the interest, so eventually those loans will be written off after 20 or 25 years.

That means that the taxpayers will be stuck with the bill.

[bhikkhu]

14. Default just means "late on payments"

when there is no legal means to actually discharge the debt.

In the current regimen, relatively high interest rates cause the debt to rise uncomfortably fast while one looks for jobs and so forth, and that debt can follow a person around for decades, growing all the while...one thing or the other should be changed.

[Sunlei]

21. yes, and someone (the banks? the money lenders?) rake in huge profits on interest.

[Yo_Mama]

24. The federal government has about 85% of the student loans

And they are losing money on it.

In 2010, the federal government basically took over the student loan market. Income-based repayments are lightening the load on students, but they increase loss ratios.

For example: After 25 years the loan balances will be written off. While the borrower is repaying under the partial financial hardship status, interest that is not covered by payments is not capitalized.

Thus even student loans that are not listed as being in default are now often not being repaid at a rate that even covers the interest. This lessens the damage to the overall economy, but it does means that taxpayer losses will be quite high.

We estimated 30%.
http://studentaid.ed.gov/repay-loans/understand/plans/income-based

Advantages of IBR

Pay based on what you earn—Under IBR, your monthly payment amount will be 15 percent of your discretionary income, will never be more than the amount you would be required to pay under the 10-year Standard Repayment Plan, and may be less than under other repayment plans.
Interest payment benefit—If your monthly IBR payment amount doesn’t cover the interest that accrues (accumulates) on your loans each month, the government will pay your unpaid accrued interest on your Direct Subsidized Loans or Subsidized Federal Stafford Loans (and on the subsidized portion of your Direct or FFEL Consolidation Loans) for up to three consecutive years from the date you began repaying your loan under IBR.
Limitation on the capitalization of interest—While you have a partial financial hardship, interest that accrues but is not covered by your loan payments will not be capitalized, even if interest accrues during a deferment or forbearance.
25-year forgiveness—If you repay under IBR and meet certain other requirements, any remaining balance will be forgiven after 25 years of qualifying repayment.
10-year public service loan forgiveness—If, while you are employed full-time for a public service organization, you make 120 on-time, full monthly payments under IBR (or certain other repayment plans) you may be eligible to receive forgiveness of the remaining balance of your Direct Loans through the Public Service Loan Forgiveness Program.

What's new about the federal student loan program is that loans that never defaulted are going to turn in a loss. But defaulted loans aren't collected at full value either:
http://stateimpact.npr.org/indiana/2012/02/20/how-student-loan-defaults-end-up-hurting-taxpayers/

And all current loss calculations are underestimates, because the subsidized program rates did not go up as scheduled last year and won't this year either, for obvious reasons.

When CBO did its calculations last year, it was assuming double the interest rate on loans that did repay.

Just because loans aren't discharged in bankruptcy doesn't mean that you can collect the money.

Student loan defaults are rising, but losses from student loans that are not listed as being in default are rising also, AND THAT IS NEW:
http://www.newyorkfed.org/studentloandebt/

The highest student loan overt default rate is now ages 40-49, at over 16%.

Update: CBO updated their estimates:
http://www.cbo.gov/sites/default/files/cbofiles/attachments/43913_StudentLoans.pdf
Note that the program is expected to cost the taxpayers as far as the eye can see.

[Sunlei]

27. how are the banks getting the interest profits then? I think there are middlemen somewhere.

[Yo_Mama]

29. The banks aren't involved in new student loans. The taxpayer is involved

The federal government is directly funding student loans, and it has been since 2010.

The taxpayer is expected to lose its ass on this program.
http://www.cbo.gov/sites/default/files/cbofiles/attachments/43913_StudentLoans.pdf

The 15% of private student loans remaining will of course continue to decline as the federal government keeps lending.

Loss ratios on student loans have always been high, but they are climbing much higher. When the federal government took over the student loan program in 2010, it figured that it would make a profit eventually.

Not only has it not happened, it isn't going to happen. Law changes don't have any impact, because the problem is with the job opportunities and wages paid to graduates. The federal government is now writing off interest on NON-DEFAULTED student loans under the income-based repayment program, and after 25 years, it is going to write off the loan balance. Or ten years, if the borrower is able to find a government job. Which is deeply unjust, btw, because why someone making more as a public worker should get that type of a benefit while some poor barista is expected to pay for 15 more years is beyond me.

[Psephos]

36. Very informative posts. Thank you. n/t

[midnight]

13. K&R

[JusticeForAll]

15. Wow- Best idea I've heard in a long time

Great job, Senator!

[closeupready]

16. Thank you, Sen. Warren! I'm going to get 'active' and call my

elected officials, and let them know I want them to support her bill. K&R

[Sunlei]

17. yes the money lenders have set-up a huge profit interest rate volcano & our Gov needs to step-in

and stop the peonage of students w/ loans.

Sick and tired of Congress/Senate ignoring the American people for their own political crap.

Sen. Elizabeth Warren can't be expected to carry this alone. The President, and any decent politicans we have left in washingtonDC should have Mrs. Warrens back.

Pick the top 20 or so issues and DAILY every morning stand up and report what members are obstructing progress. Americans can't afford to wait months, years on many of these issues. Lets resolve an issue and move on to the next.

[frankingeneral]

18. I'm going to start this with 3 caveats/background info:

1) I fucking LOVE Elizabeth Warren and everything she's doing.
2) SOMETHING needs to be done about student loans and the cost of higher education in this country.
3) I am new here, I am a raging liberal to the point that I have lost friendships over it, but I still like to think critically about things.

With that being said, is this REALLY a good idea?

Student loan interest rates are higher than the Fed's rate for a reason. Namely, default rates. Someone posted it above, but student loans default at approximately a 10% rate. I can't find any information on default rates for the money the Fed loans to banks, but I can almost guarantee you it is less than 10%. So while it may at first seem incongruous, there is a logical reason why banks pay a lower interest rate. It's the same reason that people with good credit get better interest rates.

Now with that being said, you might say, well who cares, we should be encouraging people to invest in their education with lower interest rates. I COMPLETELY agree. But arbitrarily saying that students should pay the Fed rate on student loans isn't really fair when their is a logical reason for having higher rates on student loans. On top of the logical reason concerning defaults, a lower federal funds rate helps to stimulate the economy.

Personally I think student loan rates should definitely be lower, and perhaps tied to the Fed rate (not variable, but set-in-stone at the time you take out your student loan), so that the interest rate is the Fed Rate, plus a couple of points. This way when the interest rate is obscenely low, as it is now (<.2 for awhile, I think), student loan rates will be low. Frequently low interest rates occur during recessions, so this would encourage more people to seek higher education when the job market is bad. You could also put some type of cap on the interest rate, so that when the Fed rate goes way up (like in the early 80's), student loan rates are capped at some reasonable rate, maybe 3-5%.

[hrmjustin]

19. Welcome to DU my friend!

[Sunlei]

20. I don't think the student loans can totally 'default' like walking away from a home morgagecan they?

Isn't the loan amount never forgiven, attached to every future home sale, car loan, IRS refund check..people may say they default, stop paying their loan. I don't think it's ever forgiven or has a time limit where that info drops off a credit report or is not subject to payback whenever something large like a home is sold.

[PeaceNikki]

23. This is correct. And, except for VERY rare circumstances, not dischargeable in bankruptcy.

They continue to accumulate interest until paid and are assessed additional (sometimes astronomical) fees while/if in default.

The Dept of Education can also garnish wages if federally defaulted without a judgement.

[Sunlei]

26. Thanks Peace, I though so, even defaulters will suffer the rest of their lives with debt.

I think the high college costs were part of the 'scam'.

Get federal and state gov education grant money (like the education grants each military person gets) and because the costs for college are now so very huge, add a "student loan" to the burdon of an education.

Get that second student loan covered by MORE Federal taxpayer money and then raise the interest rates to earn killer profits.

The interest rates should be returned to the exact same rate as when the loan was given. As a seperate issue the costs of college have to be adjusted way down and not at taxpayer costs.

Thank God for Mrs. Warren trying to adjust the interest rates.

[frankingeneral]

32. You're right

in that student loans can't be discharged in bankruptcy (a law that ABSOLUTELY needs to be changed), and that the government can garnish your wages and SS checks. Not sure about home sales or car loans, if one can even qualify for such things with the bad credit one gets from defaulting. But you are confusing "default" with "discharge" or "forgiveness".

Default occurs when you haven't made a payment and aren't on a deferral plan for 270 days. You can find the default rates here by year:

http://studentaid.ed.gov/about/data-center/student/default

The fact is that once a loan is in default 2 things occur:

1) collections attempts, which infinitely drive up the cost of the loan. This includes things like garnishing wage or SS checks, or suing the debtor; and
2) the government (or a lender on any type of loan) almost NEVER gets back full value due to collections costs, frequent compromises and the inability of debtors to ever repay the full amount.


And that's my point here. Defaulted loans (regardless of discharge) cost a lender more, therefore any loan with a higher default rate necessarily needs a higher interest rate. A program like Warren's which arbitrarily lowers the interest rate, without any revenue to cover the costs, is not a great idea to solve the student loan crisis, because it would shift a huge financial burden to the federal government.

Fed-to-bank loans that are at the lower rate that Warren is talking about are incredibly safe investments with almost no defaults, which is why they can be given so low. Fed loans to banks also have a stimulative effect on the economy (Krugman has long been a proponent of keeping the Fed rate low for this reason), so aside from the financial aspects of the loan itself, the fact that it stimulates the economy also warrants the lower interest rate.

[riderinthestorm]

28. You can't ever default. Even your social security checks can be garnished.

You can never NOT pay, if you have any income coming in from any source.

[PeaceNikki]

31. Oh, you sure as hell can *default*.

When you default with the bank, it goes to the state and they bang it with fees. The state will take any state refunds due to you. If you default with the state, they send to the feds and they bang it again.... and that's where the big guns are. They will garnish wages, take state and federal refunds, etc.

You can't typically *discharge* the debt but you sure can default.

[Sunlei]

22. At the very least the loan should remain at the interest rate from date it was taken.

[yurbud]

25. Wow--I was thinking of posting this as a White House petition but figured it would be treated as a

joke--she is awesome.

[yurbud]

30. WHITE HOUSE PETITION: support Elizabeth Warren's bill to give student loans same interest rate banks

You could also copy and paste this and send it to your senators and congress rep.
http://www.contactingthecongress.org/

[font size=4]support Elizabeth Warren's bill to give student loans same interest rate banks get from Federal Reserve: 0.75%[/font]

With some student loan rates set to double on July 1 -- from 3.4 percent to 6.8 percent -- Warren's bill would reduce student loan interest rates to 0.75 percent, opening the Fed's discount window to students.

This should be done to all existing student loans as well as new ones going forward.

This would free up money that would flow back into the economy in consumer buying, including things like first time home-buying.

Wall Street banks are getting those low rates to help them recover from the consequences of their own irresponsible and fraudulent behavior that crashed America's and the world's economy.

The only crime of most college students and graduates is wanting an education and a middle class standard of living.

We deserve at least as good a deal as big banks are getting.

Sign at http://wh.gov/JNiU

[warrprayer]

34. Go Elizabeth!!!

SOMEONE is on OUR side for a freaking change!

[olddad56]

35. Students aren't too big to fail.

[olddad56]

37. I think I'm falling in love with Elizabeth Warren