Congress’ failure to prevent the doubling of student loan interest rates―from 3.4% to 6.8%―took effect on July 1 adds another challenge to the recovery of the real estate market if they don’t do something about it soon. Republicans and Democrats both have plans to keep the rates low, but Massachusetts Senator Elizabeth Warren is thinking outside the box.
Higher student loan interest rates adversely affect the real estate market because it increases the debt-to-income ratio of the next generation of home buyers, making it harder for them to buy a home. If the younger generation is unable to buy a home, older generations will have a harder time selling a home. Home sellers and real estate professionals should be mindful of student debt as it affects their bottom line as well.
Although both political parties agree that student loan interest rates should remain, they disagree as to how this should be accomplished. The Republican-controlled House of Representatives passed a bill that would tie the student loan interest rate to interest rate of the ten year Treasury note, plus 2.5% for Stafford Loans. The rate would reset each year making it variable, but would be capped at 8.5%. On the other hand, while President Obama also proposes tying the interest rate to the Treasury note, he wants to make it a fixed rate.
The Congressional Budget Office analysis of the Republican plan projected that, “a first year student would receive a loan with an interest rate of about 5%, but by 2016, that same student would receive a loan with an interest rate of about 7%.”
Massachusetts Senator Elizabeth Warren has another plan. Her “Bank on Students Loan Fairness Act” would allow students to borrow at the same short-term rate that the big banks get from the Federal Reserve, which is .75%.
Sen. Warren recently asserted that the manner in which student loans are handled is fundamentally flawed. She said that he Federal Home Loan Banking (FHLB) system, which was established during the Great Depression to provide capital to mortgage lenders to increase home ownership, has made $8.5 billion available to Sally Mae, which is the nation’s largest private student loan company. Sen. Warren said that this undermines home ownership.
“The Federal Home Loan Banks were established to expand home ownership, but now it seems they are undermining that goal by helping finance more student loan debt,” Sen. Warren said at a recent Banking, Housing, and Urban Affairs Committee meeting, adding that the FHLB gets access to inexpensive capital because of government sponsorship and then lend that money to Sally Mae at a discount. “Sally Mae has been getting this line of credit for 1/3 of 1% and then turning around and lending money to students at a rate of about 20 times higher than that.”
While those on the right argue that Warren’s legislation fails to take into account the fact that the .75% interest rate that she cites is the Federal Reserve Discount Window that is only used by qualified banks for temporary shortages of liquidity and that lending institutions are less risky, which makes the low rate more appropriate than for students; those on the left contend that students are an investment in the future and cite numerous historic initiatives and that have had a positive effect. Sen. Warren and Sen. John Tierney, her co-sponsor on the bill, also argue that students are just as essential to the economic recovery as the stability of the big banks.
The National Association of REALTORS®, an organization that has worked to promote home ownership for over 100 years and that spends millions every year on lobbying, has not taken an official position on how best to deal with student loan interest rates. However, it is curious that, according to Center for Responsive Politics, the second largest expenditure of NAR’s political action committee was to the campaign of Sen. Warren’s predecessor, Scott Brown. Scott Brown was largely supported by the financial industry―an industry largely responsible for millions of Americans losing their homes.
But I digress.
Interestingly, the Massachusetts senator also took time at the committee meeting to address the that the subsidized loans aren’t really subsidized at all.
“I understand when we first started why we called student loans subsidized, but this year the government will profit $51 billion from the student loan program,” she said. “The new loans will make a profit of $185 billion over the next 10 years. It turns out that even the so-called subsidized loans make a profit of about .14 on the dollar.”
A bureaucrat explained the reason why subsidized student loans are referred to as such: “In the old bank-based program, where they gave federal loans that were guaranteed, the government paid subsidies to the financial institutions for interest accrued during periods such as being in school.”
After the senator asked if the government still paid financial subsidies to financial institutions, the bureaucrat’s reply was no.
The Senate plans on taking up the student loan interest rate issue when they return from their holiday break. It was reported that they hope to extend the lower rate for another year and make that extension retroactive. Whether or not Congress can get this done, extending the low interest rate for another year is another manufactured crisis that threatens the housing recovery upon which the economic recovery depends. Since Congress again finds itself addressing this issue, perhaps its time to start thinking outside the box.
If you are planning on buying or selling a home in the Pioneer Valley, make your first call to Michael Seward at 413-531-7129.