School’s out for the summer! Bring on the beach trips, reading lists, internships—and increases in student loan interest rates. If Congress fails to act by July 1, the rate on federally subsidized Stafford loans will double from 3.4 to 6.8 percent. Summer just got a lot less relaxing.
Luckily, Massachusetts Senator Elizabeth Warren has a plan. She introduced a bill earlier this month that would fix student loan interest rates at 0.75 percent—the same rate offered to banks by the Federal Reserve. Senator Warren argues: “Every single day, this country invests in big banks by lending them money at near-zero rates. Yet our students, if the government doesn’t do something, will be paying nine times that much. [Doubling student loan interest rates] is a bad idea economically and– more importantly– it is a bad idea morally. This is not who we are as a people. We invest in the future, and that means we invest in our kids.” Amen!
But before you skip away on a spending spree, know that Warren’s bill would only apply to new loans and serves as a one-year solution until Congress can formulate a longer term policy. Disappointingly, existing Stafford loans would keep their current interest rates under the new bill. You win some, you lose some.
This bill, while winning in theory, will surely lose on the Senate floor. Student loans and banks borrow money differently from the Federal Reserve. Loans to banks are typically made and paid back over a 24 hour period and are always secured by collateral that the Federal Reserve could confiscate should the bank default. Student loans, on the other hand, get paid back over 10 year periods. Student loans also lack security; the Federal Reserve cannot take back assets if the borrower defaults.
These two facts—being longer term and unsecured—make student loans significantly riskier than bank loans. Consequently, Senator Warren’s bill will likely die in the Senate. But if not for Senator Warren’s bill, what will save students from a lifetime of debt? Time is ticking.