Do you remember the first time you saw a Russian Doll?
You probably picked it up, slightly confused, before realizing you could open it. This surely brought a smile to your face as you had never seen anything like it. As you continue to twist-off one layer after another, you’re internally screaming “THIS IS THE COOLEST THING EVER!!!!”
After dismantling 6 little women (wait…that came out wrong), you arrive at the last one and reassemble the group.
Now that your emotional high is wearing off, you find yourself lost. “Was that fun?” “I’m not sure I even understand what happened.” “Should I do it again?”
The answer is no.
The Russian Doll just sits there.
It’s absolutely adorable, yet absolutely pointless.
(You’re welcome for the incredible [-ly bad] analogy)
Bank On Students Loan Fairness Act
A few days ago, Senator Elizabeth Warren proposed her VERY FIRST piece of legislation and IT IS THE COOLEST THING EVER!!!! If you haven’t read about her ideas, CLICK HERE (not-spam) to read about her proposal OR CLICK HERE (recommended) to watch it on YouTube.
Summary of Elizabeth Warren’s Bank On Students Loan Fairness Act
Senator Warren recognizes that there is a GROWING student debt crisis. She cites that outstanding student debt totals $1 Trillion which has surpassed credit card debt in America. She also states that banks can borrow from the Federal Reserve at a rate of 0.75%. Thus, why should our students pay 6.8% on their student loan interest while banks can borrow at essentially no cost? That doesn’t seem fair!
In order to combat this economic inequality, Senator Warren is proposing that all newly originated Federally Subsidized Stafford Loans, for the next year, would qualify at a rate of 0.75% – equivalent to the current Federal Discount Rate.
My Reaction to Senator Elizabeth Warren’s Bank On Students Loan Fairness Act
So most people hear this – rekindle their hatred for the big, bad banks – and think “THAT IS FLIPPING AWESOME!!!!”
And then (much like the Russian Doll) you begin to dismantle what’s in front of you.
And then you try to put it all together.
And now I’m confused.
There is a growing student loan debt crisis in America which totals $1 Trillion. On July 1, the interest rate on a portion of this outstanding balance will double from 3.4% to 6.8%. In order to “fix this,” we’re going to offer NEW students that apply for Subsidized Stafford Loans an interest rate of 0.75%?
I’m having difficulty seeing what this solves?
Next year, there will be an estimated $34 Billion Subsidized Stafford Loans originated. So how is this helping the current $1 Trillion outstanding?
The only thing that will happen – IF this legislation is passed – is that the PROBLEM WILL GET WORSE. As if we haven’t learned anything from the sub-prime mortgage mess?
When you reduce interest rates and make new loans more attractive – DEMAND WILL INCREASE. As DEMAND INCREASES, the PRICE OF TUITION WILL RISE. This means that more students will take out loans in order to get degrees that do not justify the investment. They will graduate with loads of debt AND will likely get a job that doesn’t require a college degree. As these students have difficulty repaying the loans, they will default. Since the funding is backed by the Federal Government, the ultimate cost will fall on the American taxpayers. This will reduce everyone’s standard of living.
I think that Senator Elizabeth Warren’s new proposal is cute, at best, and highly destructive, at worst. If taking out a new student loan becomes more attractive, demand for higher education will increase, and the cost of tuition will rise. At the same time, it does nothing regarding the existing $1 Trillion in outstanding student loans. The burden of student loans will look eerily similar to what we have witnessed in sub-prime lending in residential real estate.