Students being unfairly targeted by the federal government

Elizabeth WarrenFor the first bill she has ever brought forward, Senator Elizabeth Warren has chosen a topic which has brought her a tremendous amount of attention.

In the wake of the worst recession since the Great Depression, Warren’s “The Bank on Student Loans Fairness Act” seeks to allow students to borrow at the same rate as the big banks get when they borrow from the Federal Reserve.

Capitalizing on the anger many have to the banks and their role in the recent collapse, Senator Warren has tapped into a vein of discontent from a populace tired of watching the elite get breaks the rest of the country would kill for.

The Bank on Student Loans Fairness Act seeks to prevent a doubling of the interest rate most students pay from the current 3.4% to 6.8% as of July 1 and wishes to replace it with the rate charged to Federal Reserve banks on July 1, 2013.

Her many detractors think the bill is pure folly, that there is no chance of it succeeding and that the whole exercise is nothing more than a publicity stunt.

Warren and her co-sponsor Congressman John Tinsley (D-Mass) counter that the current student loan program will make $51 billion on the funds it lends out this year alone, which, if it was a country, would put it ahead of 136 countries and territories on nominal annual GDP, in 77th overall. The Federal government also makes 36 cents for every dollar it lends out.

How many of your investments are making 36%?

Supporters of the banks receiving this favorable rate state that banks borrow short term, have a solid record and have almost no chance of defaulting. These are the same banks that receive the equivalent of an $83 billion dollar annual subsidy from the U.S. Government on preferential interest rates valued at a 0.8% discount. The banks that were too big to fail, except that several of whom would have were it not for the implicit, and in some cases explicit, backing of The Fed.

They’re a safer bet than students?

The default rate on student loans, according to the Federal Reserve, is 13.4%, and the average outstanding student loan is $24,000. The residential loan default rate in 2012 hovered around 10.5% and the average loan size was $175,000.

Which group is the bigger risk?

Christine Lindstrom is the Higher Education Program Director for the U.S. Public Interest Research Group, a consumer advocacy organization. When comparing default rates she cautions that it isn’t exactly easy to default on a student loan.

“Student loan borrowers can only discharge their loans in extreme circumstances,” she advises. “Wages can be garnished, social security can be garnished, so if a borrower has documented income of any sort, the Federal Government can be repaid.”

How does the effort level the U.S. Government put in to saving the banks compare with what they are doing to help students?

“While five million people qualify for income-based repayment plans (IBR), only about one million are enrolled,” Lindstrom added. “Compared to the extraordinary circumstances the Federal Government took to ensure that our major banking institutions did not go under it isn’t doing much to get borrowers into IBR by comparison.”

Tiffany Dena Loftin is President of the U.S. Student Association. She sees a marked difference in the efforts to assist students and banks.

“Students are struggling while our system and the government aren’t really working for them. We see small and minor fixes, but we haven’t seen our bailout.”

Citing high graduate unemployment rates, unaffordable tuition, and a student debt rate at more than $1.1 trillion, Loftin acknowledges this problem isn’t going away, and that it will continue to affect generations of Americans well into the future, as it already is affecting several.

“The $1.1 trillion debt does not include debt incurred by parents who assist students with tuition and who incur debt on their credit cards. Despite all these hardships experienced by students and their families, there is still one group that benefits from this that is doing incredibly well – the banks.”

A disappointing aspect of Warren and Tierney’s bill is the lower interest rate is only for loans disbursed between July first of this year and July 1, 2014. Is that long enough to make a difference?

Both Lindstrom and Loftin would like to see it extended for two additional years, which would allow the matter to be discussed in greater detail when meetings start on the reauthorization of the Higher Education Act, which is due to expire at the end of this year. This mirrors the motivation behind The Student Loan Affordability Act, a bill introduced by Democrats Tom Harkin, Jack Reed, Harry Reid, and Patty Murray in May that seeks to cap the interest rate at 3.4% for those additional two years.

If anything Warren and Tierney’s efforts, along with those of the four recent Democrat arrivals have thrust¬† an under-reported issue into the spotlight.

“The (Warren) bill does a great job of highlighting the fact that federal lawmakers are delivering for the banks but not for students,” Lindstrom said.¬† “Most certainly because of Warren’s bill the question of how to justify interest rates and revenue generated from borrowers will be on the table.”

If you are a student and are reading this, first, thank you, and second, you can be forgiven for thinking the banks and the federal government don’t give two hoots about you.

You and many of your companions will graduate with uncertain job prospects, spotty job creation initiatives, record student debt, and the responsibility of caring for the aging, and larger, baby boomer generation as they head into retirement.

Wouldn’t you think somebody would recognize this and take steps to make you as productive members of the economy as possible, an economy that has just survived the greatest recession in 80 years, an economy that needs as many debt-free, high income earners participating in it as soon as possible?

Christine Lindstrom concurs.

“The federal government has lost sight of the ultimate goal, that investing in students is investing in the future of the economy and our country’s social health. Policy solutions being put out there are dictated by the short sighted need to serve the budget by generating profit from students. When they are reminded of the ultimate goal, then they act rationally. This is the same Congress and President that extended the low rate last year for one more year.”