In her first standalone bill introduced in the U.S. Senate, Elizabeth Warren (D-Mass.) offered a bill Wednesday that would slash the interest charged to federal student loan borrowers to the same rate paid by financial institutions.

The bill is a preemptive solution to a student loan interest rate hike expected in July.

Warren’s “Bank on Students Loan Fairness Act” would allow students who are eligible for federally subsidized Stafford loans to borrow at the same rate that big banks get through the Federal Reserve discount window, currently 0.75 percent.

Interest rates on federal student loans now stand at 3.4 percent. But that rate will double in July to 6.8 percent unless Congress takes action. Federal direct loans carry a fixed interest rate of 6.8 percent. But loans made to students that demonstrate financial need are subsidized and carry a 3.4 percent temporary interest rate which expires July 1, 2013.

Last year, faced with the identical issue, Congress punted the interest rate increase to July 2013.

Warren noted that since the student loans in question are federal, why can’t the U.S. government have a standard rate it charges for credit?

“Let’s face it: Big banks get a great deal when they borrow money from the Fed. In effect, the American taxpayer is investing in those banks,” said Warren in a statement. “We should make the same kind of investment in our young people who are trying to get an education. Lend them the money and make them to pay it back, but give our kids a break on the interest they pay.”

Warren also noted that the U.S. government is currently profiting from student loans after expanding its direct lending program in 2010.

“The federal government currently makes 36 cents in profit on every dollar it lends to students,” she said. “Add up all of those profits and you’ll find that student loans will bring in $34 billion next year.”

Congress will now have to decide whether to consider and/or amend Warren’s interest rate fix, extend student loan interest rates for another year, or let the rates double. The deadline for action is July 1, so expect movement on the matter on or around June 30.


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