A Tweet sent by Bernie Sanders on student loans on December 26 immediately drew ire from the Twitter-verse and various news publications. It read:
You have families out there paying 6, 8, 10 percent on student debt but you can refinance your homes at 3 percent. What sense is that?
The Tweet started sharp replies and even sharper debates, mostly on Sanders’ lack of know-how of Economics 101. The annoyance was palpable. These were some of the Tweets:
Bernie Sanders on Student Loans: Why Is The Tweet Such An Issue?
There is a simple way of interpreting Bernie Sanders’ statement that leaves him in the clear. We say that what Sanders was comparing was not the difference in interest rates between property mortgages and student loans. Instead, the statement of Bernie Sanders on student loans was that education and housing were of equal importance, and that the government should make them equally accessible to citizens.
According to Google Consumer Surveys, Bernie Sanders is highly favorable to the 18-24 voter bracket, with 49.5% favorability ratings. His unfavorability rating is only at 19.8%, and the gap between that and the favorability rating are the highest in that age bracket. One of the main reasons for this is Sanders’ stand on college tuition and student loans. The new generation wants to see hope in their future. Because of this, they are closely watching Sanders’ statements on education and student loans.
Bernie Sanders on Student Loans: What He Misunderstood
As the Twitter replies attempted to say in 140 characters, if the mistake of Bernie Sanders on student loans was in economics, it was a painfully elementary one. Asking why student loans had higher interest rates than home mortgages sits on the simplest graph of Economics 101: that of supply and demand.
Taking out a home loan, or a real estate mortgage, requires collateral. For such a large sum of money, the bank asks the borrower to use the property itself as the guarantee of payment. If the borrower can no longer pay the bank (defaults on the payment), the bank still has something of value to hold: the property. As a result, the risk to the bank is relatively low. They lose the loan payments, but they gain a tangible (physically present) asset.
On the other hand, a student loan requires collateral of a different sort. The collateral is a percentage of any of the student’s future earnings. Whether or not the student graduates, he will need to repay the loan from the bank. So far, so good for the bank. However, if the student needs to default on his debt, the bank gets literally nothing. There is no tangible asset to hold on to. The risk is higher.
The higher the risk, the higher the price. Interest rates are price tags on loans and mortgages. Because their personal risk is higher with student loans, banks put a higher price tag on these. First, these rates have the effect of narrowing down the consumer field to those who believe they can pay off the loans. Second, the higher rates (and higher profitability) covers the risk the bank is taking. Without the higher risk, the bank would probably not be able to offer the loan at all–the risk would just be too great.
Bernie Sanders on Student Loans: Why Does This Matter So Much?
Lower (or abolished) tuition fees and decreased (or abolished) college debts are a powerful part of Sanders’ presidential platform. The future his potential voters are looking forward to is the one he is painting. Sanders promises to remove tuition fees, cut down on student loan rates, and accomplish all that by imposing taxes on Wall Street speculators. His strategy is wealth redistribution at its best.
However, even that promising ideal completely loses its strength if its creator betrays a lack of basic knowledge about economics. Disillusionment is more or less inevitable in any presidential administration, but even that is preferable to being considered incompetent. The Tweet of Bernie Sanders on student loans matters to voters, because they begin to worry that their chosen candidate will not be able to apply even the basics of economics to accomplishing his promises.