Last week Senator Warren proposed a bill to allow student loan interest rates to stay at artificially low levels of 3.4%, preventing them from doubling on July 1st of this year. This new bill has been met with much enthusiasm amongst the hard progressive left. As Senator Warren released the bill, she used her infamous early 20th century populist rhetoric to try and generate support from fellow left wing enthusiasts. Here is what she wrote on an online petition for Moveon.org:
"Wall Street banks—the ones that wrecked our economy—should not be getting a better interest rate on their government loans than young people trying to go to college."
To no one's surprise, Senator Warren tries to pit the banks against the students. She has repeatedly blamed big business and Wall Street for almost all of our economic perils. Putting aside her questionable arguments as to why we should equate student loans to banking, it is first very important to examine the economics of the proposed bill and explain how it will work if enacted into public policy; as well illustrate other reasons why we are seeing students having trouble paying off their loans.
One of the biggest problems with this bill is that it aims to fix the student loan problem with the very same types of policies that created the housing bubble and are currently creating the student loan bubble.
In one of my recent pieces I wrote about how many different market signals are currently showing that we are heading towards a massive student loan crisis. Many economists agree, low interest loans and accessibility to cheap capital is one of the biggest reasons bubbles are created. Senator Warren's bill only intensifies the problem instead of putting forth a concrete solution.
Almost all data available shows that student loan default rates are skyrocketing, and youth unemployment is still unusually high, but the reason we are seeing young people not being able to pay off their loans is only partly because of a bad economy. One of the less talked about reasons, is that there are lots of young people who are going to four year universities that should not be attending college in the first place. Many high school graduates who twenty years ago might have become plumbers, mechanics, and electricians are now being swayed and convinced they have to go to college to be successful.
Keeping student loans subsidized and interest rates artificially low, allows people who can't afford to go to college, the ability to attend an expensive school they would otherwise not have been able to afford. Instead of attending a local community college or trade school, students are more likely to take out massive loans to go to schools out of their price range, if the interest rate is lower.
Not only does this bill further reinforce the policies that have created speculative bubbles in the past, but it also fails to address the bigger underlying problems behind higher education. If we continue to believe that everyone needs a four year degree to be successful, 46% drop out rates amongst college freshmen will quickly become the new norm and student loan default rates will continue to skyrocket.
The solution to the problem does not lie in a government program, but rather in the ability of students and families to make decisions independent of policy pressures. If we allow the market to set the college loan interest rates, instead of politicizing the process, we will see much more rational decisions made with regards to higher education.
I do not doubt Senator Warren's intentions. I am sure she wants more kids to be able to afford to go to school and graduate college. It seems she wants high school graduates to be able to pay off their loans within the first couple years of graduation. Although, as we have seen with many other governmental policies before, no matter how well meaning the intention of the legislation, it does not mean it will result into good public policy.
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