Elizabeth Warren finds way to inflate Higher Ed bubble even more
Warren’s first bill should be called the “Harvard Tuition Subsidization Act of 2013”
Easy access to student loans for people who have little prospect of repayment helped feed the Higher Ed bubble, much as easy access to mortgages for people who had little prospect of repayment helped feed the housing bubble. It made good politics but really bad economics.
Easy student loans have allowed higher education institutions to raise tuition at a far greater pace than any other sector of the economy:
Federal enablement of easy money goes straight into the pockets of universities, but the students have to repay the loans. It’s a system which could work only in a strong employment economy for students, but that is a thing of the past as almost half of recent graduates are unemployed or underemployed.
There is no incentive for price competition, because students easily can take out more loans.
Paying back the loans is a different matter. The art major who graduates $150,000 in debt starts off in a hole which will be hard to get out of regardless of interest rate. So too the law school graduate who never will practice law because there are few high-paying law jobs for students graduating from lower-tiered law schools, and even from some highly ranked law schools.
The system is broken.
We have a choice, continue to grow the bubble with easy money, or try to wean the nation off the easy money tuition subsidies. Certainly it can’t be done overnight, but we need to move away from growing the bubble even more.
Elizabeth Warren wants to grow the bubble more by making it easier for students to borrow more money by dropping the interest rate to that charged banks by the Federal Reserve, in what amounts to a giant class warfare non-sequitur. Trying to stimulate the economy through bank lending has nothing to do with subsidizing tuition increases via student loans.
As usual, Warren portrays the plan in terms of victimization:
The new Democratic senator from Massachusetts introduced her first bill Wednesday, the Bank on Students Loan Fairness Act, offering students temporary relief from the burden of high interest rates on loans.
“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,” Warren said during a speech on the Senate floor, her second one so far.
Under the plan–and for only one year–eligible students would be able to borrow at the same interest rates on their federally subsidized Stafford loans as large banking institutions do with the Federal Reserve.
Big banks can currently lock down a rate of 0.75 percent, Warren made sure to note. College kids, however, pay much more than that. And it’s only going to get worse for them as of July 1, when the rate is scheduled to double from 3.4 percent to 6.8 percent.
“In other words, the federal government is going to charge students interest rates that are nine times higher than the rates for the biggest banks—the same banks that destroyed millions of jobs and nearly broke this economy,” she said. “That isn’t right.”
It’s classic Warren, playing on emotions but losing sight of the actual problem. It’s similar to her campaign theme that we needed to fund infrastructure at the same rate as China, which has an infrastructure bubble.
Lowering interest rates to 0.75% from the current 3.4% doesn’t address the problem. It’s worse than rearranging the deck chairs on the Titanic, because it creates the illusion that there is no cost to money.
But the principal still needs to be paid back, so unless student loan forgiveness is the next step (probably), enabling students to borrow more money cheaply in order to subsidize tuition increases makes the bubble worse.
Not surprisingly, Warren had no co-sponsors when she introduced the bill yesterday, but she does have a big fan:
Feeding the tuition beast is not the answer. Except to Elizabeth Warren.
Update 5-10-2013: New post, More on the bad economics of Elizabeth Warren’s student loan proposal
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Comments
“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…”
What a silly bimbo. Who does she think is monetizing the deficit that funds the Department of Education by buying Treasury bonds at 0% – 3%?
And lawyers and doctors understand how the dynamics of their industries and professions have changed and dissuade their own children and friends not to see graduate schools as the answer. And all these revolutions in history get kicked into gear when young people have impossible expectations for their future.
And the colleges and universities continue their Credentials for All and inculcation of Worldviews for Change shifts that will make greedy capitalism instead of out of control Statism the scapegoat for the inability to get a job. And the relative with the Sustainability degree from the 3rd tier state U still feels quite justified in using the term “underemployed” to describe her job and what it pays.
And no one makes the connection to the open disdain for the for profit sector. The one that gets people to voluntarily part with their money for a product or service. No the Coerced Sector is somehow morally superior.
This is far more insidious than merely inflating costs. Student loans today are a form of indentured servitude — I know the courts have held other4wsie, but they are wrong as they have been before.
What Warren wants to do is indenture more kids to the federal government.
“Nothing happens in isolation.” II Sowell chapter 3, verse 2.
Like all progressive/liberal/democrat thinkers, she has no idea on how numbers work and the usual human reactions to such inept policies.
Universities like many organizations that never pay their way will gladly accept “free” money, spend it and then complain that it was not enough only to have the cycle repeat it self.
Worst of all, not one thing to correct this will occur anytime soon…
Grumpy-
I don’t know about your state but the college and university system spreads out the locations so that in many rural areas the primary jobs are working at the university (usually called that because of ed advanced degrees), the local school district, and the area hospital. Huge swathes within nominally Red States that have no genuine entrepreneurial private sector.
Fairness the polite way to tell you to bend over.
http://freebeacon.com/lawrence-odonnell-asks-for-elizabeth-warrens-autograph/
Lawrence O’Donnell Asks for Elizabeth Warren’s Autograph
Headline on the C(ertified)B(iased)S(ocialists) network web site: “Student debt burdens get government’s notice”
…I smell another d-cRAT socialist BAILOUT of irresponsible borrowers (many of whom got into this mess due to the failed policies and actions of the OBOZO regime) coming our way.
There’s only a trillion in student debt. Why not just forgive it and tack it on to the national debt?
At this point, what difference does it make?
No need to add to the National Debt. Just have the Fed print $$ and buy it. The Treasury and the banks get an infusion, the arts majors get out of debt and the Fed gets an “asset.”
I’ve noted before that the plan is to run Warren to Obana’s and Hillary’s left:
The underlying shtick will be simple: make Republicans run against Utopia. If the economy is bad, it will be because Obama did not go far enough; if the economy seems decent, it will be even better if the government meddles more.
Iirc I’ve also posted that Warren is nationally unelectable against competent opposition. Unfortunately, so are Obama and Hillary, and polls show the latter to be widely admired.
Ted, ya got yer work cut out, hoss.
The cure is to paint Warren as pro-peonage. This has the advantage of being true. It has the disadvantage of having too much of america in need of a trip to the dictionary to figure out what that is. More generally, it’s debt slavery that’s being peddled as if somehow this is a good thing. Debt slavery is evil and one of the reasons we have liberal bankruptcy laws. But student loan debt is not dischargeable, thus debt slavery.
Poor squaw; she don’t understand how white man’s discount (“overnight”) window’s wampum works.
One of my FB friends posted a piece of her propaganda showing how the Feds give a far lower interest rate to bankers than too student loans. I realized that student loans are essentially junk bonds.
Yes, tuition is out of control, are the Liz Warrens of the world and their avaricious deans are the reason. They see Federal loan money as a chance to get more cash for themselves, so the prices go up in a feedback loop as the suckers need more cash to overpay for their diplomas in taurine scatology studies. Disestablish Sallie Mae to get the prices down. Enact campus price controls to punish the education industry.
Living in Massachusetts, I am simultaneously dreading the bursting of the higher-ed bubble and masturbating furiously at the thought of the chaos it will inflict on the PC douchebag crowd.
TMI, just… TMI.
Warren’s version of Robin Hood’s slogan: “take from the middle class taxpayers, give to the rich college administrators and professors”. God damn her to hell. Readers here may imagine worse epithets I won’t post here.
The banks get the lower interest rate because the risks are lower. When you have a high loan default rate, and an Occupy crowd yammering about “how am I supposed to pay this back?” – a question that should have been asked before taking out their loans instead of afterwards – you can’t help but think that student loans are riskier.
(At least that’s the theory. Having to bail out the financial institutions in one form or another every 12 – 15 years or so, to the tune of hundreds of billions of dollars a pop, puts some severe credibility burdens on that theory.)
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