Student loans are a hot topic for many high school seniors throughout the United States as they make their final college selections for the fall semester. Many Americans believe that higher education should be both accessible and affordable to anyone willing to work hard to achieve their goals. According to the Obama administration, “Our nation’s commitment to placing a good education within reach of all who are willing to work for it helped build a strong American middle class over the past several generations." His administration's objectives for producing these results include the following: “Doubling Investments in Pell Grants, Helping Students Manage Student Loan Debt, Expanding Education Tax Credits, and Keeping Student Loan Interest Rates Low.”
Few people would want to make the argument that higher education should be inaccessible or unaffordable, but the solutions his administration proposes will likely echo past economic catastrophes like the housing bubble that our economy is still struggling to recover from. There are striking similarities between the housing bubble and the now over one trillion dollar student loan bubble.
From 2005-2007, Government Sponsored Entities — Freddie Mac and Fannie Mae — purchased over one trillion dollars in subprime and Alt-A loans. Nearly 25% of these loans were made to low and very low income borrowers due to HUD regulations. The bi-partisan support for President Bush’s American Dream Downpayment Initiative signed into law in 2003 helped make home ownership a reality for many lower income families who had poor credit (FICO scores below 660). Coupled with the unanimous Securities and Exchanges Commission April 28, 2004 vote to permit the largest banks: Bear Stearns, Merrill Lynch, Goldman Sachs, Morgan Stanley and Lehman Brothers to apply for exemptions from capital reserve calculation rules, and the U.S. Economy was headed for an eventual nose dive. Risk from these loans was minimized by government’s involvement in the market and socialized losses came as a result — remember TARP?
With costs of earning a 4-year undergraduate degree growing by about 5.2% per year, more students are taking out student loans. Freshman Massachusetts Senator Elizabeth Warren who has been touting her new bill called, “Bank on Student Loans Fairness Act,” which seeks Federal Reserve funding to subsidize Stafford Loans. Her bill would set interest rates for federally-subsidized loans at .75% for one year compared to the current rate of 3.4%, which is set to double on July 1, 2013.
“If the Federal Reserve can float trillions of dollars to large financial institutions at low interest rates to grow the economy, surely they can float the Department of Education the money to fund our students, keep us competitive and grow our middle class,” said Warren in a speech on the Senate floor on Wednesday.
The problem with this bill is that it’s repeating the same failed policies of minimizing lender risk through taxpayer subsidies while keeping interest rates artificially low to encourage more loans. With the United States national debt now at over 16 trillion dollars, can we afford the Federal Reserve pumping out more credit to stimulate higher education growth?