Monday, May 13, 2013

Warren's Idea to tie student loans to banking rates

Right now we give large banks a HUGE deal on interest rates.

The idea is to make it cheap for them to loan out money, so that they will do so.  Supposedly, the lower interest rates will trickle down to the people the banks loan out money.

Senator Elizabeth Warren (Senator from Massachusetts, driving force behind Consumer Financial Protection Bureau, oversaw TARP) wants to give students the same rate.

As per this article,  we  currently loan the money to the banks at 0.75%, while charging students almost  7.00%.   These loans are short duration loans to cover liquidity issues.   I.E.  give the bank $100 million to loan mortgage while they wait a couple of days to package them up and sell them to the Fannie Mae.

The banks get loans for hundreds of billions of dollars. (as per this report mentioned a peak of $150 billion 12 years ago, directly after the September 11th attack).

Student loans however exceed that number by quote a bit.  They are currently somewhere between $600 billion and $1 trillion. (Article about why it is so hard to tell)

Some people object to Warren's idea because of the cost.  Note that if the cost is so horrible, why do we give the banks the sweet heart deal?

Isn't the point of the Discount Window rate to encourage banks to loan money out?  Then why don't you want to encourage banks to loan money to students?

The quiet truth is we need to charge the banks more and the students less.

A solid rate of about 4% - higher than the 

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