Elizabeth Warren and Student Debt Interest Rates
So, Elizabeth Warren has proposed a strange piece of legislation. Looking at the bill itself [pdf], it's a very confused piece of legislation. The HuffPo covers it here.
First, a basic factual confusion: Warren's bill suggests that the federal government provides loans to banks through the Federal Reserve's discount window. This is incorrect. When a bank borrows from the Federal Reserve, the government is not "lending" them the money. In fact, the government isn't directly involved because the Federal Reserve is not a government entity. It's a quasi-government entity. It is "half government, half private".
Second, the bill requires that the Federal Reserve hand over some of its profits to the Treasury so the Treasury can give Direct Stafford Loans. Here's the thing: as far as I can tell this changes nothing. The Federal Reserve already gives its profits to the Treasury (apart from a small dividend that goes to its member banks). (To help you be an informed citizen: last year, the Fed paid member banks $1.6 billion in dividends, and paid $88 billion to the Treasury.) Now, those funds are earmarked for debt reduction - but all that really means in practice is that the Treasury can borrow more during the year for other purposes - like Direct Stafford Loans - knowing that it's going to be getting these funds from the Fed at the end of the year.
Third, the bill ties the interest rate on Stafford Loans to the discount rate - that is the interest rate that the Federal Reserve charges banks when they borrow directly from the Fed. (Which, I'd note is pretty rare, as the Fed manipulates other credit markets available to banks so that those rates are even more desirable.) Right now, that rate sits at 0.75%.
Fourth, the bill only does this for a year.
So, what does this all boil down to?
Elizabeth Warren is engaging in some serious political theater to just say "Hey, instead of having rates on student loans rise to 6.8%, let's push them down to 0.75% for a year." That's it, as far as I can tell.
Some points that bother me:
(1) The availability of cheap student loans doesn't appear to be connected with actually making college "more affordable". Instead, skyrocketing tuitions are soaking up all the available funds, leading students to need more funds. (This should be shocking to no one, I would note. When you subsidize something, you get more of it. If you subsidize student loans, student loans will grow.)
(2) Student loans are very difficult to get rid of - even in bankruptcy. So, making them cheap (and therefore desirable) actually enslaves the students even more.
(3) Student loans that graduates DO get rid of in bankruptcy don't just go away. Those losses are borne by someone - in this case, the taxpayer who funded them in the first place.
(4) The argument that higher education is a "public good" that requires subsidies is hopelessly weak. Higher education provides substantial benefits to the student themselves - enough to cover the cost of most non-Ivy-League colleges. (That's even ignoring the general problems with public good arguments.) That being the case, having the taxpayer pay for someone else's education is really just pure redistribution. Whether you like that or not is up to you, but let's not call it something other than what it is.
Elizabeth Warren is an odd one. On the one hand, I think her books on personal finance are quite good (All Your Worth is my most recommended book when it comes to budgeting). On the other hand, her politics are dodgy - even for politicians. (For example, her statements on the minimum wage are a bit striking - strikingly wrong that is, since the share of income going to employee compensation is almost exactly what it was in 1960. So, sure, minimum wage workers haven't had incomes that kept pace with overall productivity - but workers on the whole have. This suggests that minimum wage workers aren't the ones who are more productive. If that's the case, why should they be compensated based on other people's productivity?) On the third hand, I think it's perfectly fair to attack the privileged position of banks - as they have virtually always enjoyed certain legal privileges in this country, and that position has been increasingly obvious in the past few years.
If nothing else, she's an interesting politician to watch. She tackles interesting issues, and comes up with interesting proposals - interesting because they're often weirdly off-base, but interesting nonetheless.
First, a basic factual confusion: Warren's bill suggests that the federal government provides loans to banks through the Federal Reserve's discount window. This is incorrect. When a bank borrows from the Federal Reserve, the government is not "lending" them the money. In fact, the government isn't directly involved because the Federal Reserve is not a government entity. It's a quasi-government entity. It is "half government, half private".
Second, the bill requires that the Federal Reserve hand over some of its profits to the Treasury so the Treasury can give Direct Stafford Loans. Here's the thing: as far as I can tell this changes nothing. The Federal Reserve already gives its profits to the Treasury (apart from a small dividend that goes to its member banks). (To help you be an informed citizen: last year, the Fed paid member banks $1.6 billion in dividends, and paid $88 billion to the Treasury.) Now, those funds are earmarked for debt reduction - but all that really means in practice is that the Treasury can borrow more during the year for other purposes - like Direct Stafford Loans - knowing that it's going to be getting these funds from the Fed at the end of the year.
Third, the bill ties the interest rate on Stafford Loans to the discount rate - that is the interest rate that the Federal Reserve charges banks when they borrow directly from the Fed. (Which, I'd note is pretty rare, as the Fed manipulates other credit markets available to banks so that those rates are even more desirable.) Right now, that rate sits at 0.75%.
Fourth, the bill only does this for a year.
So, what does this all boil down to?
Elizabeth Warren is engaging in some serious political theater to just say "Hey, instead of having rates on student loans rise to 6.8%, let's push them down to 0.75% for a year." That's it, as far as I can tell.
Some points that bother me:
(1) The availability of cheap student loans doesn't appear to be connected with actually making college "more affordable". Instead, skyrocketing tuitions are soaking up all the available funds, leading students to need more funds. (This should be shocking to no one, I would note. When you subsidize something, you get more of it. If you subsidize student loans, student loans will grow.)
(2) Student loans are very difficult to get rid of - even in bankruptcy. So, making them cheap (and therefore desirable) actually enslaves the students even more.
(3) Student loans that graduates DO get rid of in bankruptcy don't just go away. Those losses are borne by someone - in this case, the taxpayer who funded them in the first place.
(4) The argument that higher education is a "public good" that requires subsidies is hopelessly weak. Higher education provides substantial benefits to the student themselves - enough to cover the cost of most non-Ivy-League colleges. (That's even ignoring the general problems with public good arguments.) That being the case, having the taxpayer pay for someone else's education is really just pure redistribution. Whether you like that or not is up to you, but let's not call it something other than what it is.
Elizabeth Warren is an odd one. On the one hand, I think her books on personal finance are quite good (All Your Worth is my most recommended book when it comes to budgeting). On the other hand, her politics are dodgy - even for politicians. (For example, her statements on the minimum wage are a bit striking - strikingly wrong that is, since the share of income going to employee compensation is almost exactly what it was in 1960. So, sure, minimum wage workers haven't had incomes that kept pace with overall productivity - but workers on the whole have. This suggests that minimum wage workers aren't the ones who are more productive. If that's the case, why should they be compensated based on other people's productivity?) On the third hand, I think it's perfectly fair to attack the privileged position of banks - as they have virtually always enjoyed certain legal privileges in this country, and that position has been increasingly obvious in the past few years.
If nothing else, she's an interesting politician to watch. She tackles interesting issues, and comes up with interesting proposals - interesting because they're often weirdly off-base, but interesting nonetheless.