The current student loan set-up is not good for our long-term financial health, as a generation in debt weakens our economy
Last week, Senator Elizabeth Warren debuted her inaugural legislative effort, a bill intended to stop the cost of federally subsidized student loans from doubling from 3.4% to just under 7% on 1 July. Warren’s solution? A one-year temporary fix that would allow students and their parents to borrow money for higher education at the same rate the Federal Reserve charges banks for short-term loans, which is about 0.75%.
More than a few pundits caterwauled. Not serious, they said. A grandstanding politician looking for a few cheap publicity plaudits, they complained. “Her usual class warfare bias,” sniffed right-wing website NewsBusters. “A populist values statement,” complained Megan McCardle at The Daily Beast. “We like students, we don’t like banks.”
Stunt or no, Warren’s bill has a particularly good raison d’etre.
It offers a clear demonstration of whose interests our political system prioritizes – and, no, it’s not the ambitious students seeking to get ahead.
As Tamara Draut, author of Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead and vice president of the progressive think tank Demos, put it: “The legislation has jumpstarted a much needed conversation about the cost of federal student loans, and put congressmembers who want to jack up the rates of federal loans in the difficult position for arguing for better treatment of the big banks than of students.”
Warren herself was not shy about making the link when she introduced the bill. As she said on the floor of the Senate, ‘We shouldn’t be profiting from our students who are drowning in debt while we’re giving great deals to big banks,” – the “same banks,” she was quick to add, “that destroyed millions of jobs and nearly broke this economy.”
Banks get to borrow cheap because they have access to the wand of sparkle dust known as the Federal Reserve’s discount window – the financial system equivalent of a quickie loan for a preferred, regular customer with a long track record of paying the money back. Even the federal government pays more to borrow than banks, with the rate on the 30-year Treasury bond currently hovering around 3%.
But both banks and the student loan industrial complex share one thing in common: they are both perceived as, if not to big too fail, highly unlikely to fail. Yet while the government has provided emergency financing to banks in the past to keep such an event from occurring, the borrowers themselves prop up the bonanza of student debt. There is little in the way of help out there and it is all but impossible to have the money owed discharged in bankruptcy court.
The result: a generation of former students so indentured to debt, they are weakening the greater economy. The New York Federal Reserve made the case a few months ago that the ever-increasing amount of monies owed was siphoning money out of the housing and auto markets, as 20-somethings with debt are less likely to own their own home or car. And that’s not all. Student loans impact everything from family formation to spending on frivolities. One study, out of the University of Wisconsin, found women with college debt less likely to marry than their unencumbered peers. Those who owe money likely spend less on leisure activities: the NPD group, a consumer market research outfit, released research less week claiming restaurant visits by members of the Millennial generation has declined by 6%.
All of these numbers were recently confirmed by a survey conducted by Harris Interactive on behalf of the American Institute of CPAs, which found 40% delayed retirement savings and car purchases, and another 29% punting on home ownership as a result of their student loans. A further 15% admitted to postponing marriage.
Moreover, like the mortgage crisis, student loans, while ubiquitous, are more likely to impact minority communities.
According to the Center for American Progress, while just under two-thirds of white college graduates are battling loan debt, four out of five African Americans with recently issued degrees face a continuing monthly tab for their education decades into the future. African Americans also borrow more money, graduating with $28,692 in loans, as compared to their white counterparts who owe almost $4,000 less.
The financial services sector, on the other hand, has been a winner in recent years. JPMorgan Chase and Wells Fargo recently reported record profits. Even as millions of Americans continue to struggle with keeping up with mortgage payments on underwater homes, New York Attorney General Eric Schneiderman announced plans last week to sue Wells Fargo and Bank of America for flouting the terms of last year’s federal foreclosure settlement. And while Wall Street bonuses might not be back up at the highs hit prior to the financial crisis, they averaged $121,900 cash for the most recent season. That’s not exactly chump change to most Americans, who continue to see median household income – which is less than half the average Wall Street bonus – decline as income inequality continues to grow.
Ironically, Warren’s bill makes no mention of the 15% of student loans issued by private bank lenders, which burden borrowers with higher interest rates and more onerous terms and penalties than their federal counterparts.
Warren, of course, is far from the only politician seeking to fix the student loan mess. There are other plans out there. The Obama administration is attempting to advance a plan to make the student debt rates variable, with the rates being pegged each year to a percentage point above the 10 year Treasury note, something that sounds great in our current low interest rate environment, but could quickly turn into a problem in a more inflationary economy.
Representative Karen Bass is sponsoring legislation that would forgive up to $45,000 in debt after ten years of faithful payment, as well as allow for conversion of some privately issued loans to easier manage federal ones.
Others are seeking to restore bankruptcy protections for student borrowers. And the Consumer Financial Protection Bureau, the government department Warren conceived and birthed, issued a report last week suggesting a number of reforms for the private student loan market, including allowing holders to refinance to take advantage of historically low interest rates, and tying monthly payments to income.
Yet it’s Warren’s plan that gets to the heart of what bothers people about the student loan bills due. It’s not just the amount of money owed, or the consequences for individuals or the overall economy. It’s that our government is increasingly viewed as favoring the interests of a small and wealthy interest group at the expense of our collective future. Little wonder that a petition Warren set up on MoveOn.org in tandem with her legislative effort has received more than 246,000 signatures in less than a week.
You don’t, after all, need to be Karl Marx to understand why the current student loan set-up is not good for our long-term financial or political health.