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Not Far Enough on Student Loans

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A rule change was announced today by the White House which will make it somewhat easier for some students to repay their student loans. While any such change should be applauded as a step in the right direction, the wonky nature of the changes aren't exactly a restructuring of how the student loan program works. It's a few baby steps in the right direction, but these changes do not go far enough by a long shot.

A proposal from Senator Elizabeth Warren would drastically change the program, but so far it hasn't gotten President Obama's full-throated support. While I understand that Obama can rightly say that he's doing what he can on student loans outside of Congress, if he truly wanted to reform the program he would get solidly behind Warren's proposal and push it as hard as possible, in an effort to shame at least the Senate into acting upon it.

Warren's proposal -- the very first bill she introduced as a senator, in fact -- is simplicity itself: charge students the same interest rate that banks get from the federal government. This rate is currently below 1 percent, I should mention, although in better economic times it would be slightly higher. But it is always the cheapest interest rate in America, because banks lend the money they get from this borrowing to others at higher interest (so they can make a profit off of it). Investing in the future could mean (if Warren's proposal were passed into law) that not only banks would get this rock-bottom rate, but also students.

It's easy enough to make the political case for doing so. "America's children are our future" is a good place to start. We would be investing in that future, and making it a lot more attainable for students to achieve. The rationale for lending federal money out at low interest to banks is that it provides a lot of capital to the banking system, meaning there is more money out there to boost the economy. If the rate were higher, banks wouldn't be borrowing as much, to put it another way. Hiking this interest rate means slowing the economy down -- something the government does only to cure ills such as runaway inflation. But there really is no good reason not to make the same investment in students.

Student loans used to have a middle man. The government guaranteed the loans to the banks offering them, which meant the banks raked in a healthy risk-free profit for nothing more than doing a little paperwork. This was changed a few years ago, when the government essentially cut out the middle man and began loaning the money to the students directly. But what this also meant was that all the interest on the loans went straight into the federal coffers. Rather than being a pure investment in tomorrow's workforce, it also became a profit-making venture for the government. This means that adopting Warren's plan would impact the budget and the deficit. Billions of dollars would disappear from the government's income if students were offered rock-bottom loan rates.

This makes it a dicier political issue, to be sure. But it also opens up an argument Democrats might use to convince Republicans to get on board with the idea: "This is a hidden 'tax' on students that we want to cut!" Couch it in tax-cutting language, and Republicans might not be so insistent on making budget cuts to offset the lost revenue. After all, House Republicans just passed billions in tax loopholes without even attempting to offset them in any way. So why not do the same thing for cutting the "taxes" of high student loan rates?

This could provide an economic boost to the whole country, especially if students with outstanding loans were allowed to refinance them at the new low interest rate. It's already been documented that people in their 20s have been putting off big purchases (things like new cars, for instance) because they are struggling with monstrous student debt. Slashing the interest rate to the bone would mean they could pay off these loans years earlier, because more of their payments would be going to the principal rather than the interest. Paying off student loans faster means young adults will have more disposable income faster. Putting more money into the economy from young graduates can have an overall beneficial effect on the economy as a whole.

Of course, this wouldn't solve all the problems with student debt. It wouldn't solve the problem of the high cost of college, for instance, and it wouldn't lessen the amount students have to borrow to attain a degree. But it would lessen the repayment burden considerably. So while it is nice to see President Obama doing what he can, on his own, to tweak a few rules on student loans, it really doesn't go far enough. Wholeheartedly getting behind Senator Warren's idea to charge students the same rate as we charge banks would signal a much more fundamental reform of the entire student loan system. It would make it easier for students to repay their loans, and by doing so it would allow them to spend more of their earnings on goods and services, which would help boost the economy. These students are the brightest America has to offer, and making it easier for them to gain a higher education will help guarantee a well-educated workforce for the future. Making student loans more affordable means making college more affordable for all but the wealthiest families. President Obama should champion Warren's plan to make a much more significant reform to the way America's students pay for their education. After all, if America can afford to loan banks money at such a low interest rate, then we should also be able to afford to offer the same rate to students.

 

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