Elizabeth Warren is back on the student debt beat. The Massachusetts Democrat has announced that she is introducing legislation that would allow certain borrowers to “refinance” their old education loans at today’s low government rates. To help pay for her plan, she would enact the ever-popular Buffett Rule, which would impose a minimum tax rate on millionaires.
This is mostly political theater. Republicans will surely vote against the bill, which will let Democrats say the GOP sided with the rich and against students. End of scene. But I must say: So far as pieces of stunt legislation go, it’s a vast policy improvement over Warren’s last high-profile stab at the student loan issue.
As you may or may not recall, the first bill Warren ever introduced into the Senate would have temporarily let college kids borrow at the same rock-bottom 0.75 percent interest rate the Federal Reserve offered banks at its discount window. Why do that? Because, she said at the time, student lending was profitable, and “students deserve the same break big banks get.” The claim seemed pretty preposterous, since the two types of loans had absolutely nothing in common. The discount window provides short-term, emergency lending to banks in order to stabilize the financial system, and the debts are paid back with ease. Student loans, by comparison, are repaid over at least 10 years and have tragically high default rates.
Worse yet, Warren was essentially arguing that the government should hand a giant windfall to new borrowers using profits it had made off of yesteryear’s students. Considering that so many ex-college goers were already delinquent or in default on their debts, this seemed a bit perverse to many of those who followed student finance closely. Still, it went over well politically with student activists and colleges, who of course would have stood to benefit from a new round of cheap lending.
The new bill gets things right by reaching out to borrowers who are already in debt. It’s also designed to target those with high loan balances compared to their income, meaning it should generally benefit those who need it most. (Though not always. Plenty of doctors come out of med school with high debts and low incomes, before going on to make money hand over fist.)
The legislation also contains one exceptional idea that would both save taxpayers money and assist students. Before the Obama administration ended the practice in 2010, many student loans were issued by private banks and backed with government guarantees. Thus, taxpayers took all the risk while lenders took all the profits. Warren’s bill would allow the government to, essentially, buy back those loans—as of 2013 there were about $294 billion worth outstanding—while handing students a lower interest rate. Since Washington would finally get its share of the returns to go with the losses, it’s pretty much all upside. And because the old guaranteed lending program was a nonsensical giveaway to banks to begin with (it was born out of a budget gimmick that disappeared when Congress changed its accounting methods), reclaiming those debts seems ethically reasonable.
The same can’t be said for another portion of the bill, which would allow borrowers to refinance their purely private loans from lenders like Sallie Mae. Not to sound like I’m wearing a tricorner hat or anything, but this is pretty much straightforward government expropriation. The Department of Education would simply issue a low-interest loan that would let borrowers pay off their entire private debt. Since pre-payments equal a loss to the lender, Washington would essentially be seizing their profits. Now, private student lenders have their warts; during the credit bubble, for instance, they took advantage of students with what the Consumer Financial Protection Bureau deemed “subprime-style” lending tactics. They also benefit from some absurd regulatory protections, such as the fact that private student debt effectively can’t be discharged in bankruptcy. But does that mean it’s time to start grabbing their assets? I’m not so sure. As Libby Nelson at Vox notes, the CFPB has already proposed some less aggressive ways to encourage a private refinancing market. Perhaps it would be worth trying those first.
Nonetheless, there’s good stuff in this legislation that, even though the whole thing seems designed to embarrass one party, still shouldn’t be so controversial. It’s not often you get a win-win for the government and borrowers, such as buying back guaranteed loans. Obviously Republicans aren’t going to welcome the Buffett Rule or seizing Fannie Mae’s loan portfolio. But it’d be a pity if they wrote off the rest of the bill, too.