BOSTON Student loan debt in the U.S. recently hit a new high of $1 trillion. That’s a drag on young people’s finances and, according to the Federal Reserve, it’s a drag on the economy, too. Action this week on Capitol Hill could make a big difference in the growth of that debt load, as interest rates on new Stafford Loans — government subsidized, need-based student loans — are set to double July 1.
A proposal to freeze those rates could come to a Hill vote this week. And Massachusetts U.S. Sen. Elizabeth Warren is pushing her own stopgap measure that would radically reduce interest rates for one year. It’s the first piece of legislation she’s introduced since being elected last November, and while it’s drawing some support, it’s also attracted scorn.
Bank On Students Loan Fairness Act
Twenty-one-year-old Diamond Reddick of Boston faces a choice Sen. Warren says should be easier. Talking with an adviser at a student loan assistance center at the Boston Public Library, Reddick says that to enroll in her preferred occupational therapy program next year she’d need loans and grants worth up to $20,000 a year.
The decision, she says, will affect not only her own pocketbook, but her mother’s and sister’s as well.
“We can’t afford to really go to a school that I want to go to, so I have to put everyone into the situation when making the decision, which makes it hard, but it’s what I have to do,” Reddick said.
It could get a lot harder if Congress doesn’t act now: Interest rates on federally subsidized Stafford Loans are set to double on July 1 to 6.8 percent. President Obama is proposing a fix. House Republicans have a plan. And Sen. Warren does, too.
The Bank on Students Loan Fairness Act is the only bill Warren has submitted since her election last year. She pitched it at a recent meeting of education leaders in Boston.
“[Sen. Warren’s bill] has a nice ring to it if you don’t know anything about how interest rates work.”
“There’s data now suggesting that young people are delaying buying homes,” Warren said. “Families are crushed by student loan debt and this means they can’t support an economic recovery.”
Warren says a long-term solution will have to wait. As a stopgap for the next fiscal year, she wants the interest rate on new loans for lower-income students rolled back to the same discounted rate the Fed offers big banks for so-called “overnight” loans — 0.75 percent.
The comparison fits neatly with the kind of populist rhetoric Warren used in her campaign — contrasting the needs of the poor and middle class with perks for the “fat cats” of the U.S. economy.
“These are the same banks that cost millions of Americans their jobs and nearly broke the economy,” Warren said this week in a conference call that MoveOn.org says drew more than 10,000 listeners. “And a student who takes out a loan later this summer, if Congress doesn’t act, will have to pay nine times as much on her debt as big banks would. It isn’t right, it isn’t fair, and it isn’t good economic policy.”
Nearly 450,000 people have signed a MoveOn petition in support for Warren’s bill. But conservatives are panning it. And the Brookings Institution, a centrist think tank, is calling it “a cheap political gimmick.”
“I think it is entirely symbolic,” said Brookings fellow Matthew Chingos. He and other critics say Warren is comparing apples to oranges — low-risk banks taking short-term loans, versus high-risk students getting long-term aid.
“Perhaps, though, it’s what a lot of her constituents want to see,” Chingos added. “And it has a nice ring to it if you don’t know anything about how interest rates work.”
According to Tufts University political science professor Jeff Berry, Warren is veering slightly from the freshman senator’s traditional mantra: Keep your head down. But Warren gets respect in the Senate, he says, because of her ties to the White House, her public reputation as a financial watchdog and her proven fundraising ability.
And she’s made a savvy choice on the issue, Berry adds.
“Given that Massachusetts has so many college students and so many universities, it’s a natural position for a liberal Democrat to push on this issue because it’s going to resonate with the voters and it’s going to raise her profile with people that could vote for her for decades,” Berry said.
Even supporters of the Warren bill say it’s not likely to see a vote. But she’s also signed on to a more likely vehicle co-sponsored by Senate Majority Leader Harry Reid. It’s a two-year fix that would freeze rates at the current 3.4 percent. Votes on that are expected as early as Wednesday.
Whatever temporary solution emerges, Warren has put down a marker for debate next year, when broad higher education legislation is up for reauthorization.