Here at The Project, I’ve been saying for a while that the low interest student loan bubble we are blowing at this moment directly parallels the housing bubble that burst in 2008… I tend to think this bubble is largely because of one woman who happens to be a rising star for the Democrats. Senator Elizabeth Warren championed a massive overhaul when she started campaigning for her Senate seat and then introduced a particular bill in May of last year. Here is what happened…
Warren put forward a student loan bill that would make it possible for students to pay the same interest rate big banks pay the Federal Reserve, which is .75% between July 1, 2013 and July 1, 2014. This was put forth prior to July 1 of last year, when the federal loan rates were set to double from 3.4% to 6.8%. Here is the fact sheet for Senator Elizabeth Warren and Congressman John Tierney’s (both co-sponsors) Bank on Student Loan Fairness Act if you want to know more…
While I’m no advocate of the Federal Reserve juicing up the economy or Wall Street having advantages or engaging in crony capitalism, Warren’s example with the Federal Reserve is a bit misguided. The Fed’s loan program to banks is meant to provide low cost financing so the banks can then lend to businesses at a low rate. This is meant to stimulate the economy by increasing the money supply. If she is referring to the federal Funds rate, that rate is set at near zero today. But that rate only applies to overnight loans made to a bank whose actual reserves fall below the reserve requirements.
Warren used convincing language when she rallied around this issue saying it was a “middle class issue.” She said that the federal government would make a ton of money off poor struggling students if the rates weren’t changed.
Warren’s bill didn’t pass, but a compromise did. According to The Guardian, “The rare compromise emerged only after a frenzy of summer negotiations, with lawmakers at odds over how loan rates should be set in the future even while they agreed that a doubling of rates – it kicked in July 1 when Congress failed to act before the deadline – would be bad policy and bad news for students.”
When explaining how the rates were set, the article went on to explain, “Undergraduates this fall will borrow at a 3.9% interest rate for subsidized and unsubsidized loans. Graduate students would have access to loans at 5.4%, and parents would borrow at 6.4%. The rates would be locked in for that year’s loan, but each year’s loan could be more expensive than the last.”
Offering college students low interest loans sounds wonderful, but what has happened as a result of this legislation is downright awful. Just about anyone interested in any kind of “higher education” including community college students, people taking online college courses, theater majors that probably won’t be able to get a job, etc., etc., etc., can now borrow a ton of money for college without much consequence in the form of having to pay interest. The government has essentially incentivized banks to make these loans to people who can’t prove on paper they have much chance of paying the money back.
It is strikingly familiar to the housing crisis… Just about anyone could get a low interest loan to buy a home without undergoing much scrutiny of earning potential, salary, assets, outstanding debt, or any other measures traditionally considered when a bank financed a new home.
Well… this student loan deal is now officially another handout. According to The Wall Street Journal’s “Low-Cost Loans Entice Students More for the Cash Than a Degree,” data shows people are using this money that was intended for education costs to cover their living expenses. The stories are far-reaching, and it’s frustrating that so many people can’t get jobs, can’t get good jobs, and are in this bind in the first place. The common denominator, though, is that many people that can’t afford to put food on the table are taking out student loans to cover their living expenses.
If you read “Jobless-Benefit Cuts Test Case,” also in yesterday’s Wall Street Journal, you learn that North Carolina quit providing unemployment benefits six months earlier than the rest of the country. From that, we’ve learned that overqualified people are all too often forced to take lower level jobs while a huge number of jobs for which people aren’t properly trained go unfilled.
I’m scratching my head because it seems that without programs like “low interest rate student loans to just about anyone,” we would solve our own programs more quickly. We wouldn’t need government-led job development programs either. If a bank required data like ‘field of study’ before providing a loan, students would gravitate toward the programs that would equip them with the necessary skill sets and certifications to get a good job upon graduation.
But for today, we are yet to see the massive consequences of this student loan bubble play out. Know we will have to clean up the shrapnel at some point because getting in there, changing the paradigm, and pulling the economic levers is never the real path to fiscal sanity.
Let the free market do its thing… uninterrupted and unbridled like a wild horse. It will always require us going through some pain. I sincerely hope the next “Hope and Change” campaign slogan to sweep the nation is “There’s no way around, but through… ” because this statement conveys the importance of transparency, honesty, authenticity, and the bead of sweat beneath the brow required to get anywhere. ‘Til then, refusing to go through some pain will only cause us to hemorrhage.
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Bidwell comment: We aim to restore the world view upon which this country was founded. We want legislation that incents good behavior, leaving most decisions to the many communities that make this country great. Americans at large must value hard work, sacrifice, prudence, and self-reliance the way Americans historically have up to this point.
I don’t think that Cory Gardner, is the right choice for the U.S. Senate. There is another candidate that has conservative credentials, his name is Owen Hill. He has been endorsed by the Tea Party Express, and he has also received the endorsement from Ron Paul. – Anonymous
Bidwell comment: So here is the problem for The Project as well as the entire country. I understand your point for the Colorado Senate race. Note that I also received messages essentially saying, “Who cares who the more conservative candidate is. Get the conservative in who can win.”
As I understand it, about 10-15% of Americans have the ideas that the Tea Party espouse. There are many more fiscally conservative folks who don’t see themselves as hardliners, aren’t as vocal, and are simply more “quiet” about their political views.
We’ve got to get a majority, while still holding on to our principles and values. This is the challenge, and we have to figure out how to do it if we hope to put our country on a sustainable fiscal path. In my opinion, this is the one obstacle standing in our way to real change and a better America.
Please keep the feedback coming… We will continue this conversation because it is important. We have to figure this one out. We need to present a united front, and we need that united front to spread all across the nation. You all tell me how we will do it.