Elizabeth Warren Pushes for Lower Student Loan Rates (0.75%) for One Year
The Senator from Massachusetts is sponsoring her first bill, “The Bank on Students Loan Fairness Act”. The purpose of the bill is ostensibly, to give students the same preference to low 
interest rates as banks get from the Fed’s discount window – less than 1%. (The discount window is a facility offered by the central bank that allows eligible financial institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity.) The bill lets students take advantage of the same low rates offered to banks for one year while Congress finds a fair, long-term solution on student loan interest rates.
Some Background
Robert T. Stafford Student Loan Program
Stafford loans are fixed-rate student loans guaranteed by the full faith of the US government. The government guarantee should mean lower interest rates for students compared to other private loans. Students can get two types of loans: Direct Unsubsidized Loans and Direct Subsidized Loans.
1. Direct Unsubsidized Loans
This category of student loans is available to undergraduates, graduates and professional students. The interest rates for loans given between July 1, 2012, and June 30, 2013 is 6.8%.
2. Direct Subsidized Loans
Direct subsidized loans are available to undergraduate students with financial need. As of July 1, 2012, graduate and professional students are no long eligible for direct subsidized loans. For subsidized loans given between July 1, 2012, and June 30, 2013, undergraduate students pay 3.4% in interest. Subsidized loans therefore, have a lower interest rate.
In 2012, interest rates of Direct Subsidized Stafford Loans were due to double from 3.4% to 6.8%. However, Congress intervened to prevent this increase from taking place (in anticipation of November elections perhaps) and forestalled the increase for another full year.
On July 1st, 2013 the temporary halt to rates doubling will cease. Rates will go up from 3.4% to 6.8%. Congress is likely to vote on another temporary stay on the interest rate increase.
The Bank on Students Loan Fairness Act
However, Senator Warren wants to do more than just delay a seemingly inevitable rise in student loan rates. Warren’s Bank on Students Loan Fairness Act allows students to borrow at interest rates that are equivalent to the interest rates at which the Federal Reserve System provides to banks through the Fed’s discount window overnight rate as banks or 0.75%. The low rate will be in place for one year.
Warren wants students to be charged a rate equal to the rates banks are getting from the government. Her bill applies only to Direct Subsidized Stafford Loans. The loans will be funded through the Federal Reserve and be administered by the Department of Education.
Warren is probably eyeing the Fed’s profits from its operations. The Federal Reserve sent $88.9 billion in profit to the Treasury Department in 2012, a record. Over the last five years the Fed has bought $2.7 trillion in Treasury securities and mortgage-backed securities. The interest payments on those securities are the primary source of the Fed’s profits. The Fed has transferred a total of $335 billion to the Treasury since 2009. However, because the Fed holds mostly Treasuries, its profits are largely payments from — the government.
The Ethics of Senator Warren’s Bill
According to Senator Warren her bill seeks to obtain fairness. She wants those without the power of position and money to have direct access to the low interest rates offered to banks by the Federal Reserve System.
The Fed argues that Quantitative Easing which, entails the policy of keeping interest rates low, is necessary to give a boost to economic and job growth. Senator Warren’s response is that the burden of student debt is hindering economic recovery because borrowers are not spending. Thus, lowering rates for student loans will also be ultimately good for the economy. If it is fair to lower rates for banks to attain economic growth, then it is just as fair to lower rates for student loans for the same objective.
In addition, the Federal government and its agencies bailed out banks when they seemed to be in danger of failing during the financial crisis in 2008. So in fairness, if student loan borrowers appear to be danger of falling into a debt crisis, the government also should go to their aid, with as much alacrity as it did with the banks.
Senator Warren launched a petition on MoveOn.org. So far the petition has 319,516 signatures.
What do you think? Is Senator Warren’s bill a way to obtain some fairness?