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Warren’s Student-Loan Demagoguery

May 28, 2013 by

As in her campaign, she ignores the truth to stir populist anger.

By Ian Tuttle

‘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.”

That is the logic behind the first piece of legislation from Harvard Law School professor-cum-Massachusetts senator Elizabeth Warren, introduced in the Senate two weeks ago. The Bank on Students Loan Fairness Act seeks to extend to students the same loan interest rates allegedly offered to the country’s chief financial institutions. Among the problems with the bill? Said interest rates for said greedy banks do not exist. But that is a minor detail in Warren’s latest exercise in cheap populism.

During the summer of 2012, as Barack Obama and Mitt Romney competed in a game of “How Low Can You Go?” on federal student-loan interest rates, Congress tussled to a stalemate on the issue, settling for a one-year extension of the 3.4 percent interest rate on subsidized Stafford loans, those available to students with demonstrated financial need. The government pays the interest on subsidized Stafford loans while the student is in school (hence “subsidized”). But the current rate extension is set to expire July 1, and if Congress does not act, the interest rate will double for 7 million students.

“We can’t afford to wait,” Warren has said, doing her best to rally supporters to action in a made-up crisis. We are in need of a long-term solution, but Warren’s bill is not it.

Brookings Institute fellows Matthew M. Chingos and Beth Akers dismiss the proposal as “a cheap political gimmick.” Not only would it be in effect for only one year, but, as they neatly summarize the proposal’s approach, it “confuses market interest rates on long-term loans (such as the ten-year Treasury rate) with the Federal Reserve’s Discount Window (used to make short-term loans to banks), and it also does not reflect the administrative costs and default risk that increase the costs of the federal student-loan program.”

In pushing her bill, Warren, for her political convenience, has studiously misrepresented the interest rates extended to banks. “The banks pay interest that is one-ninth of the amount that students will be asked to pay,” she complained. “That’s just wrong. It doesn’t reflect our values.” Warren derided the notion that “the banks get exceptionally low interest rates because the economy is still shaky and banks need access to cheap credit to continue the recovery,” adding, “our students are just as important to our recovery as our banks.”

What Warren is alluding to is the Federal Reserve Discount Window, which the Fed defines as “an instrument of monetary policy that allows eligible institutions to borrow money, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions.” Warren may have been a professor in a past life, but even the most rabid deconstructionist is unlikely to associate an “institution” that has “temporary shortages of liquidity” with a typical college student.

But it is not confusion; it is misrepresentation. The Discount Window is an emergency measure used to prevent runs on banks; it is offered “short-term.” And these measures are typically very short-term: frequently, overnight.

As the Daily Beast’s Megan McArdle observes, “No one except possibly a lunatic has told Elizabeth Warren that banks are getting 0.75 percent at the discount window as a thank-you for all the hard work they’re doing helping the economy.” Banks get those low rates for three sound reasons: “The borrowers have assets and income that are easy to seize, the loans are quite short term, and the banks are required to put up collateral. . . . Students, on the other hand, are borrowing for a decade, and the only thing they’re putting up as a guarantee is their character.”

via Warren’s Student-Loan Demagoguery | National Review Online.

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