Sen. Elizabeth Warren wasted no time going to bat for college students last week, introducing a bill –– her first as Senator –– that would let students take out federal student loans at the same dirt cheap interest rates as big banks.
Warren’s Bank on Student Loans Fairness Act reduces the interest rate on federally subsidized Stafford loans from 3.4% to 0.75% for new borrowers.
“Some argue that it’s too expensive to keep government loans at low interest rates, but the federal government makes low-interest loans all the time, just not to everyone,” Warren said. “The biggest banks in the country –– the ones that wrecked our economy and cost millions of Americans their jobs –– pay next to nothing on their debt, while students pay nine times as much.”
Warren is going against the grain, as Congress will soon debate over whether to double interest rates on federally subsidized Stafford loans to 6.8% or leave them be. Doing so would affect some 8 million borrowers.
Is Warren’s proposal really ‘Fair’? By her estimates, the government makes $0.36 for every dollar it lends to students, for a total of $34 billion this year. Giving students the same discount as big banks would level the playing field, but the reason banks get that cushy rate in the first place is that they are seen as less risky borrowers. That is, they’re more likely to have the funds to pay Uncle Sam back.
On the other hand, student borrowers have a number of things working against them: College costs are rising, they’re graduating with $26,000 of debt on average, they still can’t discharge student debt in bankruptcy, and more than 13% of of them default on federal loans within three years of graduating.
It’ll be interesting to see how this plays out. While Congress has repeatedly extended the cap on federally subsidized Stafford loans, we’re not sure they’ll be willing to bend as far as Warren would like.
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