Dec 13, 2013
Elizabeth Warren’s QE for Students: Populist Demagoguery or Economic Breakthrough?
Posted on Jun 14, 2013
By Ellen Brown, Web of Debt
This piece first appeared at Web of Debt.
On July 1, interest rates will double for millions of students – from 3.4% to 6.8% – unless Congress acts; and the legislative fixes on the table are largely just compromises. Only one proposal promises real relief – Sen. Elizabeth Warren’s “Bank on Students Loan Fairness Act.” This bill has been dismissed out of hand as “shameless populist demagoguery” and “a cheap political gimmick,” but is it? Or could Warren’s outside-the-box bill represent the sort of game-changing thinking sorely needed to turn the economy around?
Warren and her co-sponsor John Tierney propose that students be allowed to borrow directly from the government at the same rate that banks get from the Federal Reserve—0.75 percent. They argue:
Those criticisms would be valid if the provider of funds were either a private bank or the American taxpayer; but in this case, it is the U.S. Federal Reserve. Warren and Tierney assert, “For one year, the Federal Reserve would make funds available to the Department of Education to make these loans to our students.” For the Fed, completely different banking rules apply. As “lender of last resort,” it can expand its balance sheet by buying all the assets it likes. The Fed bought over $1 trillion in “toxic” mortgage-backed securities in QE 1, and reportedly turned a profit on them. It could just as easily buy $1 trillion in student debt and refinance it at 0.75%.
Which Is a Better Investment, Banks or Students?
Students are considered risky investments because they don’t own valuable assets against which the debt can be collected. But this argument overlooks the fact that these young trainees are assets themselves. They represent an investment in “human capital” that can pay for itself many times over, if properly supported and developed. This was demonstrated in the 1940s with the G.I. Bill, which provided free technical training and educational support for nearly 16 million returning servicemen, along with government-subsidized loans and unemployment benefits. The outlay not only paid for itself but returned a substantial profit to the government and significant stimulus to the economy. It made higher education accessible to all and created a nation of homeowners, new technology, new products, and new companies, with the Veterans Administration guaranteeing an estimated 53,000 business loans. Economists have determined that for every 1944 dollar invested, the country received approximately $7 in return, through increased economic productivity, consumer spending, and tax revenues.
Similarly in the 1930s and 1940s, the Reconstruction Finance Corporation funded the New Deal and World War II and wound up turning a profit, without drawing on taxpayer funds. It’s an initial capitalization was only $500 million; yet the RFC eventually lent out $50 billion – the equivalent of about $500 billion today. It raised money by issuing debentures, a form of bond. It got all of this money back, made a profit for the government, and left a legacy of roads, bridges, dams, post offices, universities, electrical power, mortgages, farms, and much more that the country did not have before.
In 1944, President Franklin Roosevelt proposed an Economic Bill of Rights, in which higher education would be provided by the government for free; and in the progressive 1960s, tuition actually was free or nearly free at state universities. Some countries provide nearly-free higher education today. In Norway, Denmark, France and Sweden, the cost of college is less than 3% of median income, as compared to 51% in the U.S.
Other countries make loans available to their students interest-free. For more than twenty years, the Australian government has successfully funded students by giving out what are in effect interest-free loans. They are “contingent loans,” which are repaid only if and when the borrower’s income reaches a certain level. New Zealand also offers 0 percent interest loans to New Zealand students, with repayment to be made from their incomes after they graduate.
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