Matthew Chingos and Beth Akers have a useful rundown of competing legislative proposals over how to set the interest rate on federally subsidized students loans that includes an epic burn on new Sen. Elizabeth Warren (D-Mass.) whose proposal, we’re told, “should be quickly dismissed as a cheap political gimmick.” After briefly dismissing it, they write that “[s]etting aside this one embarrassingly bad proposal, the remaining proposals raise a set of questions that need to be answered in order to select the ideal policy. … “
Warren’s proposal is unquestionably a cheap gimmick. But I don’t remotely see why it’s a bad proposal.
To recap, Warren’s stunt is to argue that the federal government should, as a one-year measure, peg the student loan rate at the same low interest rate (0.75 percent) that the Fed offers to banks at the “discount window” for overnight loans. Chingos and Akers offer the following breezy critique:
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.
The case for gimmickry here is airtight. The discount window is an overnight loan, and a student loan is a long-term loan. Long-term loans always carry higher interest rates than ultra-short ones, so the implication here that the government is somehow screwing college students while coddling banks is totally wrong. It’s pure political theater. But the Chingos/Akers critique has an air of “the food is bad and the portions are too small” to it. If the problem with lowering the student loan rate to the discount window rate is that it’s too fiscally costly, then making it a one-year measure is the solution. Over the long term, having the federal government lose tons of money through student loan defaults would be a bad idea.
But in the short term with unemployment more than 7 percent and the inflation rate running well below the Federal Reserve’s self-imposed 2.5 percent threshold, there’s nothing wrong with having the federal government lose money. Cutting student loan rates to an ultra-low level will leave indebted twentysomethings more able to buy chairs and socks and all the rest, raising demand and creating jobs, and there will be no crowding out of private business investment. As long-term policy, this would be totally unsustainable, but as one-year policy, it’s a nice little boost to the economy.
Is it totally arbitrary? Yes. I’d say it’s also a bit unfair. Even people who don’t have student loans deserve to benefit from some stimulus. As I’ve said many times, my preferred approach would be to print some money and mail it to everyone, giving equal help to all people whether or not they’re grappling with college debt. But compared to the status quo, this is a fine idea.