Senator Elizabeth Warren has introduced what I would call a seismic proposition, one very likely to disturb the sleep of complacent politicians. Why, she asks, should the Federal Reserve lend money to banks at an interest rate of less than 1 percent when the government intends to charge students 6.8 percent interest on their college loans? The senator posted an amusing billboard on her official website: Want to borrow money from the government? Don’t be a student. Be a bank.
Warren has proposed legislation—her very first bill—to correct this anomaly. Instead of doubling the student loan rate from 3.4 to 6.8 percent, as the government did in July, she wants it reduced to the same rate that banks are charged at the Fed’s discount window: 0.75 percent. In addition, Warren wants the Fed to pay for this modest debt reduction, just as it did for the Wall Street bailouts. “Every time the US government makes a low-cost loan to someone, it’s investing in them,” the senator explained in an interview. “The US government does that every single day through the Federal Reserve. It invests in the largest financial institutions in this country. We should be willing to make that same kind of investment in our kids who are trying to get an education.”
This comparison should embarrass Washington: as Warren observed, the government actually makes money on its student loan business. It will collect $51 billion this year, according to the Congressional Budget Office. “In other words,” she said, “our kids have become a profit center, while the big banks walk away with the subsidy.” Try explaining that to the young people drowning in a trillion dollars of debt.
Conventional experts sputter that banks are different from students. “Yeah, I know that,” Warren countered wearily. That’s her point: Why should students be treated as less important than banks? “There’s a nice parallel here,” she said. “In fact, it gives us a chance to explore just what the values are that underlie whom the government helps.” The senator hopes her measure will inspire a national debate about values and public investment. “Of course we need a financial system,” Warren said. “But we also need young people to get educated. We also need infrastructure. We also need research. Those are all investments. I want us to have a bigger conversation. As a country, where should our investments be? Because right now, in my view, we are starving the wrong groups.”
Warren got off to a fast start as a reform-minded senator because, in a sense, she has been preparing for this role for more than twenty years. As a Harvard law professor, her specialty was bankruptcy law, but the real focus of her study has been the shifting social and economic forces that are tearing apart middle-class families and darkening the future for young people.
Warren eviscerates the frequent facile claims that the financial collapse was the result of citizens’ greedy overconsumption or irresponsible borrowing. In a series of books, she has documented the causes of growing household indebtedness and bankruptcy over the last generation, especially among women. Despite working longer hours at more jobs, families typically tipped into failure with one bad break: a serious illness or a laid-off earner. Warren tells their story persuasively in her book The Two-Income Trap (2003), written with her daughter, Amelia Tyagi.