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Senate Sensibly Ties Student Loans To Markets


The congressional debate over indexing federal student loan interest rates appears to be nearing conclusion. On July 1st the rate for future borrowers doubled due to congressional inaction. Now a retroactive measure to address this is wending its way through Congress. On Wednesday the Senate voted 81-18 to pass a bill that will link college loan interest rates to market rates.

Some pols, however, just can’t seem to get their heads around the contours of what’s really at play here. Elizabeth Warren, who earlier this year proposed to reduce student loan rates to 0.75 percent, was outraged:

Noting that the government stood to bring in nearly $200 billion over the next 10 years because of the higher rates, Ms. Warren denounced the bill.

“This is obscene,” she said. “Students should not be used to generate profits for the government.”

Warren’s own preferred plan, we note, was laughed out of the debate by none other than that leading bastion of conservative thought, the Brookings Institute:

Sen. Warren’s proposal should be quickly dismissed as a cheap political gimmick. It proposes only a one-year change to the rate on one kind of federal student loan, confuses market interest rates on long-term loans (such as the 10-year Treasury rate) with the Federal Reserve’s Discount Window (used to make short-term loans to banks), and does not reflect the administrative costs and default risk that increase the costs of the federal student loan program.

None of this is about generating profits for the government. It’s about reining in a huge subsidy that has been inflating a bubble in higher education by profoundly distorting price signals. Of course, this plan still doesn’t come close to even addressing the tuition inflation problem. But it’s at least heartening that the Senate has come together to roundly reject the bizarrely myopic schemes of the bluest of its members.

[Ball and chain image courtesy of Shutterstock]

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  • Andrew Allison

    I guess we should be grateful that Warren won election to the Senate, where the damage she can do is limited to posturing.

  • Bruce

    This bill made sense. But if market rates go up and the student loan rates go up, there will be whining and grandstanding.

    • Thirdsyphon

      That’s probably true. . but all that would interrupt is Congressional whining and grandstanding about something else.

  • Kavanna

    Warren’s whole political career is a cheap gimmick, although she herself isn’t: a wealthy member of the 1% and a professor at that ultra swank law school on the banks of the Charles (or nearby, anyway).

    Warren doesn’t know anything about finance; she just parrots whatever she last read. I’ve tried to read her popular books, and they’re a joke. She grapples with serious themes, but she can’t understand cause and effect and misses very obvious things. Of course, the “research” is lifted — in garbled form — from other, more informed academics.

    Her promotion to and at Harvard Law School was partly based on her made-up identity as a native American.

    An inflated and very overrated figure.

  • Alex Weiner

    “Markets” in the sense of the word that you intend to use it do not set bond yields. The fed does…

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