Sen. Elizabeth Warren has called for student loan borrowers to be given the same interest rates as big banks are given – 0.75%. Her rationale is that if Americans invest in banks, they should likewise invest in education; the “little guy” should get the same treatment as the wealthy, connected corporations; and that student loan payments are crippling the economy.
Sen. Warren is entirely correct: student loan indebtedness is killing our chances of a recovery and will create long-term problems that we cannot fathom. Lowering the interest rate will help graduates to spread out their payments over more years, lower their payments, or pay down the principal. Unfortunately, it will also encourage universities to raise their tuition even more: reducing interest rates enables buyers to pay more in principal, so sellers increase their prices. The end result is that young students will have an even larger amount of principal that they simply cannot pay off, and taxpayers who don’t have those loans will be irate at the thought of paying for them.
Likewise, Sen. Warren is correct that the little guy and the big guy should be treated the same way by the federal government; she errs in assuming that both groups should beg (or bribe, via campaign contributions) the feds for help, and the feds should distribute largesse equally. A far more sane system would reflect the pre-1930s view of the federal government – one in which it simply lacked the power to grant sweetheart deals to various corporations, give waivers to some companies but not others, or put taxpayers on the hook for student loans. Giving sucg sweetheart deals to “the little guy” or “young people” is a patchwork fix for an entirely rotten system, akin to putting nicer tile on a floor that is rotting out.
I’m not advocating that we totally ignore problems unless they can be fixed entirely, and I see the value in popping an Advil when you’re waiting to see the doctor about that leg injury. But these fixes are the type of things that worsen the problem; it’s not economic triage so much as repeating (and worsening) the same mistakes and refusing to acknowledge that there is an underlying problem. Easy fixes would include things like making the universities co-sign the loans: the two-fold benefits would include fewer irate “I was responsible with my education, why am I paying for yours” taxpayers and a higher education system that would have to reduce overhead, operate efficiently, and rein in tuition increases. One other fix would be to reduce the regulations that enable big banks to bury their community-bank competition in paperwork. (Yes, big government means big regulations, which big business can handle better than little businesses.) But those aren’t sexy fixes, nor anything that would get the Occupy crowd to march on D.C., so Warren isn’t suggesting them.