In this country student loan are a type of financial assistance offered to students that has to be repaid in future, as compared to other type of assistance as scholarships, donations and allowances. These loans play a pivotal role for students pursuing higher education in USA. Nearly 12 million of students apply for and utilize these loans to pay off their educational costs. In European countries these loans are available in a more subsidized form and are usually government backed. However, in USA, majority of college education is funded by either students themselves or their families with public organizations being financed partially by state and domestic taxation. USA’s higher education sector has proved to be a profitable investment both for public and the individuals, despite the fact that the returns acquired from these investments are generally overstated in several cases according to Jason Spencer Student Loan.
Federal capital started to provide security by acting as a guarantor for students’ loans granted by banks and other lenders in 1965, inaugurating a program which is now termed as FFEL. The first student loan granted at federal level, however, assigned under Education Act 1958, were actually direct advances capitalized through Treasury finance, pursuing a proposition of renowned economist Milton Friedman. Eventually, when Congress decided to expand these advances, the budget regulations made the security approach becoming more appealing. (Febp.newamerica.net, 2014)
Lowest share of direct loans (2007)
In 2007, direct loan program volume touched the lowest point as a percentage of total capital student loan level since the time it commenced in 1990s. However, this declining trend got upturned in 2008. Extensive credit crunch and financial collapse in 2008 & 2009 challenge the ability of several private lenders to grant advances/loans under government backed student finance program, and several lenders stepped out from the program. As a result, schools who were pursuing guarantee program previously switched to direct finance program which once again boosted its volume in 2008 according to Jason Spencer Student Loan.
Elimination of FFEL (2009 & 2010)
In 2009, US President Barack Obama proposed to eliminate FFEL and all student finances must be made under direct loans. He disagreed that subsidies granted to private lenders according to program were needless and cost reduction can be made if all student finances are provided under direct loan program. Therefore, eventually, in July 2010 FFEL was eliminated and all fresh loans were provided under direct finances.
Elizabeth Warren proposed student loan bill (2014)
Elizabeth Warren’s bill proposed to allow all student private borrowers to refinance their loans at subsidized prevailing rates and as a result rich class will not face any increase in taxation. Overall, senate voted 56 to 38 against the proposed bill. This response was highly regretted by Warren who criticized that Democrats are not willing to provide any financial solution to students and like to exaggerate on an issue. She argued that if this bill would have been implemented it will provide a financial cushion to the students pursuing higher studies. Through its implementation all existing borrowers will have to pay a lower interest rate of 3.84% which current borrowers are offered and paying. In contrary, President Obama’s administrative action to enhance income-based repayment arrangement to previous loans, this step would have helped private borrowers which generally face very high interest rates. (The Wire, 2014)
Elizabeth Warren’s Agenda
Elizabeth Warren is considered as an advocate of providing a financial cushion to students by refinancing their education loans on lower prevailing rates and doesn’t support the growing debt burden on them in recent years. She took a stand for middle class families who are unable to afford higher education and are highly pressurized by education debt burden. She argued that nearly 40 m of individuals are under the education debt burden of $1.2 trillion and it hampers the ability of people to acquire homes, automobiles and commencing small projects and an immediate action needs to be taken to curb the situation. (Rolling Stone, 2014)
She further urged to issue fresh college loans on no or very low interest rate that banks on Wall Street acquires from Fed- to moderately bipartisan. Her suggestion to refinance existing student loans fewer than 4% interest rates almost cleared the Senate this summer, and will once again will return to Senate for fresh voting in upcoming months. She criticized country’s policies for investment in paving taxation loopholes created by billionaires and imposed students to repay their debts at higher interest rates Jason Spencer Student Loan.
Bill’s current status
The bill was advocated and supported by all the Democrats and two separate individuals as well. Three Republicans also voted in the favor of the bill. However, rest of the Republicans did not seem to be supportive. Despite of receiving a negative feedback from the Senate, Warren stands positive about the Bill’s outcome in upcoming years.
President Obama’s Response
President Obama supported Warren’s bill of refinancing student loans in one of his addresses on August 2014 and also motivating students to perform efficiently in their classes in upcoming fall season. During his weekly address, he supported and advocated Democratic Senator Elizabeth Warren’s approach towards student financial aid and assistance Jason Spencer Student Loan.
Warren’s Bill which was unable to gain any approval in Senate this June would permit 25 m student loan borrowers to refinance their payments at prevailing lower rates. White House seems to be a firm supporter of this bill, whereas president personally encouraging the bill approval and implementation on different occasions recently. He urged that students should also be allowed to refinance their loans just like their parents are allowed to refinance their mortgages. His further emphasis was on universities’ tuition costs that need to be curbed and controlled and advised students to perform well this year. During his address he motivated younger people to take perform in their academic field diligently and further highlights the importance of education through numerous suggestions and set forth Warren’s Bill possibility to be approved for the welfare of USA’s students. His speech seems to be supportive of Warren’s agenda which is evident in his several addresses at different occasions. (http://www.washingtontimes.com, 2014)
WARREN BILL’S MISSING ELEMENTS
As the preceding paragraphs highlight, the student loan bill that Senator Elizabeth Warren is trying to push through congress will have a lot of benefits for the students as it allows them to refinance their existing outstanding loans at a much lower rate that is prevalent nowadays. The following paragraphs will seek to explain how this bill or any other bill that relates to this subject may be shaped in the future.
In order to cover this topic thoroughly, let us take a critical analysis of Elizabeth Warren’s bill and see what it is missing. On the face of it, it makes perfect sense, why should students get stuck with paying such a high interest rate when other bank loans such as mortgages are considerably lower.
The fact that the costs associated with this bill and its implementation has to be supposedly borne by a new tax that will be levied on millionaires makes it for sure that this bill will be met with failure in terms of gaining votes from Republicans in congress is concerned. I would recommend for future bills on this issue that they should not be linked to any other tax. The fact that with the effect of this bills, the defaults would go down anyway would mean the government would save money. Hence, the bill could pay for itself. (Gobel, 2014)
Here it has to be noted that any future bill should not make the same mistake that Warren’s initial bill did. It basically called for the students to be allowed to get loans refinanced at the inter-bank lending rate of 0.75 per cent. This is absolutely absurd if you have any background in finance or just a general understanding of how banking works. The inter-bank lending rate is one for banks to borrow for short terms in order to stabilize the financial system. How can this be compared to the same situation when applying to students who repay their loans over ten or more years and also there is a very high chance of default on these loans when compared to the inter-bank lending.
Warren also initially made the mistake of not taking into account the laws that were already in place to check student default rates. The laws that already exist can actually offer forgiveness to students (even high income ones) and their payments could also be adjusted according to their income. These laws that already exist should be taken into consideration when looking at the different bills that could be proposed to help students pay off their debt in the future.
Looking over the Warren bill, I also believe there are a lot of new topics on this issue that previous bills have not taken in to account. In my opinion, these should form the foundations for any new bills proposed and passed on this sensitive topic.
First of all we have to know that the college tuition fees have risen considerably in recent memory. The fact that students have to pay more comparatively means that there should be some allowance in the system that allows them relief in paying off this huge debt. The burden of debt of younger generations is such that they do not consider themselves as truly graduated until they have paid off their student debt. The fact that they will be paying off their debt so much so in the future means that they will be more likely to delay all the different life events that their parents and grandparents went through. This includes important events like starting a family or buying a house. This means that the entire economic growth of the USA will be likely to slow down. If there are people still paying off loans they carried rather than spending on or thinking about spending on a house means that the economy could suffer as a whole.
There are also experts that suggest the overall cost benefit analysis of college education shows that the benefit of college education far exceeds the entire costs incurred. With this in mind, we could say that it is necessary to make sure that students do not borrow too much. As I see it, the problems begin to appear if the initial salary of a college grad is less than what he owes the bank for the student loan. Any future bill to re-finance loans should also have strict stipulations with regards to the amount the students are allowed to borrow. This would mean that students that borrow more than what is necessary to spend on other expendable items would be constrained.
FUTURE OF WARREN’S BILL
The future appears to be really bleak as it stands though. The reason why I say this is spelt out in the numerous paragraphs above. I can imagine there will be a lot of mechanisms put in place for people to be forgiven their student loans because they simply could not pay. The reason I say this is built upon the premise that as people continue to take loans for college and the college’s own tuition begins to increase and to add to that the number of pupils in college begin to increase we can see the logical conclusion forming, that is there will be many more defaults in the future and the bills passed now should take this fact with a pinch of salt and accept it. The quicker they realize this is a significant problem, the faster they would be able to form logical solutions in the form of bills that could counter it.
Lastly, I will mention something about Tom Harkin, the senator from Iowa. He tried to legislate that student loans should be made part of a person’s overall bankruptcy claim. This is certainly not allowed at present and would make for bleak viewing in terms of bank allowing credit to students considering the number of bankruptcies there are in America. It is precisely this kind of ill-though out, stop gap measure that could lead this situation to even more deterioration. The need of the hour is legislation that not only tries to make up for mistakes in the past, but rather be a beacon of light for legislators who try to solve any other problems that may arise with respect to this issue in the future.
Febp.newamerica.net,. (2014). Background & Analysis. Retrieved 15 September 2014, from http://febp.newamerica.net/background-analysis/federal-student-loan-programs-history
http://www.washingtontimes.com, T. (2014). Obama pushes Elizabeth Warren’s student loan reform bill. The Washingtion Times. Retrieved 15 September 2014, from http://www.washingtontimes.com/news/2014/aug/16/obama-pushes-elizabeth-warrens-student-loan-reform/
Rolling Stone,. (2014). The Student Loan Crusader: How Elizabeth Warren Wants to Reduce Debt. Retrieved 15 September 2014, from http://www.rollingstone.com/politics/news/the-student-loan-crusader-how-elizabeth-warren-wants-to-reduce-debt-20140820
The Wire,. (2014). Senate Votes Down Elizabeth Warren’s Student Loan Bill. Retrieved 15 September 2014, from http://www.thewire.com/politics/2014/06/senate-votes-down-elizabeth-warrens-student-loan-bill/372579/
Gobel, R. (2014). What Elizabeth Warren’s Student Loan Bill Is Missing. Forbes. Retrieved 15 September 2014, from http://www.forbes.com/sites/reynagobel/2014/05/07/what-elizabeth-warrens-student-loan-bill-is-missing/