If Congress doesn't act by July 1, Stafford loan interest rates will double from 3.4 percent to 6.8 percent. These loans are offered to undergraduate and graduate students attending college at least half-time at a low cost to borrowers. By the end of 2012, 39 million students were receiving student loans; that's up from 70% in 2004. If you think this only applies to students, you are wrong. Student loan debt is the largest non-mortgage debt in America, totalling some $966 billion. The American economy and student loan debt are intrinsically linked together. At least there's one member of Congress who seems to understand this.
When consumer advocate Elizabeth Warren (D-Mass.) was running for the Senate seat in Massachusetts, she made protecting college students a central part of her campaign. She made promises to her constituents that she would address the country's student loan problem if elected, and it looks like she is trying to make good on that promise by introducing her first piece of stand-alone legislation.
Warren's bill would require the Federal Reserve to allocate money to the Department of Education, which would then provide student loans to those eligible at the same rate banks get. Big banks can borrow money for as low as 0.75%. Warren has a real problem with that: "In other words, the federal government's going to charge interest rates nine times higher than the rates they charge the biggest banks — the same banks that destroyed millions of jobs and nearly broke the economy. I don't think that's right."
Some of you may be wondering how financially wise a scheme like this would be, but according to the Congressional Budget Office, the government makes 36 cents in profit on every student-loan dollar it puts out. That means that student loans will net the government some $34 billion dollars next year. The New York Times reports that Stafford loan borrowers make up a third of all those using federal student aid. Increasingly, students are having to make more and more sacrifices in order to pay back their student loans. This includes forgoing marriage and saving for retirement. The burden of student loan debt has rendered millions unable to participate in vital sectors of the American economy such has the housing or auto markets. In turn, this affects the overall health and ability of the economy to flourish and recover from the Great Recession.
What are the chances of something like this passing? Not so good, but Warren is hoping to help frame the debate on student loans before the July 1 deadline. For the sake of students everywhere, let's hope that she does.