The Provocative New Bill That Would Slash Student Debt

Elizabeth Warren has announced her first bill as freshman senator from Massachusetts: giving students the same discounted interest rate on their loans that big banks get. The Bank on Student Loan Fairness Act is controversial, reducing the federal Stafford loan rate from 3.4% to the discount window price of 0.75%, but as she told Huffington Post: “Every single day, this country invests in big banks by lending them money at near-zero rates. We should make the same kind of investment lending money to students…”

It’s a sound argument, but one that not everyone is accepting.

One of the reasons big banks like Goldman Sachs and JPMorgan Chase enjoy such tiny interests rates is that they’re considered low-risk investments. These entities can and will pay that money back. The current discounted rate also allows the government to keep liquid assets for use in emergencies. It’s good for the economy.

Warren understands these reasons, but she isn’t budging. She notes that high student debt is also affecting the economy. In the last ten years, student loan debt has risen dramatically from an average of $10,649 to $20,326. A recent Washington Post blog reminds us that young people are now far less likely to buy homes or cars, because students who feel suffocated by college loans simply don’t want to rely on credit to make other big purchases. Warren believes that the economy will continue to suffer until the burden of student debt is lessened.

Senator Warren’s proposal comes at a conspicuous time, just before Congress gathers to debate student loan rates. Unless Congress decides to extend the lower rate for another year, the current 3.4% interest for Stafford loans is set to double on July 1 to 6.8%. Warren is talking about doing much more than that – she wants to cut it by nearly 80%. The question is whether this is a winnable fight, and the answer is probably “no.”

The federal government makes a lot of money from Stafford loan payments, pulling in approximately 36 cents per dollar loaned – about $36 billion this year. It’s a hefty chunk of change to lose, so unless she can gain massive support, Senator Warren will face a swift defeat. The plan right now is to mobilize students who are suffering under these high interest rates and get them to speak out, to initiate a discussion. “This is about their lives,” Warren said, “and if they are active in this fight, we can make this change.”

It’s a talk worth having. An opinion piece from the New York Times talks about the need to restructure the way we finance education. In Australia, student loans are mandatory, but their repayment is income-contingent, so students don’t pay more than they can afford. Repayment is done via tax collection, avoiding the mess of further bureaucracy.

Is this a system that could work for us? We should be examining all our options, and by floating her bill, Senator Warren is essentially demanding that we have a conversation about the inequality of loan rates. Even if her bill doesn’t pass, she’s showing the government and her constituents that she’s ready to put up her dukes to protect education and our future, and she’s saying that we should do the same.

What do you think? Is the new bill proposal a good idea? Or will the economy collapse even further with a slashed student loan interest rate? Sound off in the comments below.