Chapman: Liz Warren's college loan plan a loony idea | Boston Herald

Chapman: Liz Warren's college loan plan a loony idea | Boston Herald:

Chapman: Liz Warren's college loan plan
 a loony idea

Tuesday, May 21, 2013)

By:

Cornelius Chapman

Every now and then a law is proposed that is so blissfully ignorant you don’t know whether to laugh or cry.

In 1897, for example, a country doctor persuaded the Indiana legislature to adopt his value for pi, the ratio of a circle’s circumference to its diameter that has bedeviled mathematicians since ancient Egypt.

The source of his knowledge? Supernatural revelation. Why bother with boring calculations when you hear voices?

In the 21st century, we have U.S. Sen. Elizabeth Warren’s “Bank on Students Loan Fairness Act,” which would set the interest rate on student loans at the rate at which banks borrow from the Federal Reserve. The justification — if you can call it that — is that if the Federal Reserve lends money to banks at less than 1 percent, the federal government shouldn’t charge students more than that.

A petition to the White House in support of the bill has been singled out by detractors as one of the stupidest responses to the “We the People” initiative, but it has attracted a quarter of a million signatures. If the laws of finance, like the value of pi in Indiana, are put to a vote, Warren’s bill will pass in a landslide.

Memo to the senator and her post-adolescent petition signers: Just because you’re angry doesn’t mean you’re right.

The Federal Reserve’s discount rate is lower than the rate charged on student loans because banks, unlike students, provide collateral for loans.

There’s nothing wrong with tying an interest rate to a lender’s level of risk — in fact, banks are criticized by regulators if they don’t. You pay a higher rate on your credit card than your car loan because if you default on a car loan the repo man tows your car away, putting your lender back in funds promptly.

When you default on your credit card, the bank gets in line with everybody else and gets pennies on the dollar. What they lose on each bad debt they have to make up somewhere else.

Student borrowers offer no security, in contrast to those bad banks who, according to Warren’s “fact” sheet, “wrecked our economy.” Most college grads have no immediate source of repayment, and their near-term prospects aren’t much better unless they majored in a subject that will lead to a high-paying job quickly.

So a proposal to charge students the same rate as banks is about as smart as the kid who majors in puppetry and expects to land a high-paying job when he graduates.

Unless you listen to voices in your head, in which case it will make perfect sense.

Cornelius Chapman is a freelance writer in Boston.