Earlier this week, Senator Elizabeth Warren (D-Mass.) introduced legislation in the Senate that would make the interest rate for federal student loans the same as it is for banks and large corporations. Yet the bill, her first since becoming the Bay State’s senior senator in January, will do more harm than good to the students she claims to cherish, while enriching only a select few at their expense.
In recent years, federally guaranteed, funded, and/or subsidized student loans and other forms of financial aid have flooded the higher education sector. According to the 2012 Trends in Student Aid, published by the College Board, annual federal grants to students increased 185 percent, annual federal student loans increased 120 percent, and tax breaks for education spending increased a whopping 209 percent just over the past decade. Rather than make higher education more affordable, this massive increase in government funding of tuition is making matters worse. Tuition at public four-year colleges has also increased 66 percent in the past ten years, while the tuition at public two-year colleges increased by 47 percent – both of which are adjusted for inflation.
Basic economic theory teaches us that price is a function of supply and demand. If more and more dollars are being made available to college-aged students – stimulating “demand” – to pursue enrollment in educational institutions, the price is going to increase. As a result, the impact of the available aid and higher prices will be felt by the average recipient.
With the average debt per borrower upon earning a bachelor’s degree increasing by 18.4 percent over the ten years, student loans have an increasingly important role to play in expanding access to education. Encouraging students to borrow more against their futures at the artificially low rate of 0.75 percent, which Warren advocates for in her bill, does absolutely nothing to address the underlying problem of escalating tuition costs. It merely creates a politically convenient illusion of focusing on a crises which the government in large part has brought into being – just pure political theatre with very real consequences.
The Senator should know better. After all, the nation is only now recovering from the mortgage loan subprime crisis that was largely caused by the same type of policies that she is advocating for in her legislation. Now, Ms. Warren wants to apply this same malformed logic to education. By providing even more funds to college students at artificially low rates, she merely exacerbates the problem she purports to solve – education affordability. Prices will be stoked to further rise and students will take on more debt, and in the end, many students will be left with a degree worth less than the student loans underwriting the education.
Perhaps like her Native American heritage, understanding the basic principles of economics is another thing that Warren falsely campaigned about in 2012.
