As part of the democrats’ new “Fair Shot” agenda, Senator Elizabeth Warren (D-Mass.) reintroduced legislation last month aimed at easing the burden of student loan repayment.
This bill will reportedly come up for a vote soon, perhaps as early as this week. In advance of that, let’s talk about one of its features that could help for just about every type of borrower: the ability to refinance private and federal student loans at the current low interest rates.
Refinancing Federal Student Loans
Warren’s previous proposal to lower interest rates, The Bank on Students Loan Fairness Act, proved to be a total non-starter. That bill proposed lowering student loan interest rates to 0.75%, to match a short-term rate specifically reserved for banks to borrow money and stabilize the economy.
This new bill does not lower rates to a level that low, which I would prefer. However, it’s definitely a step in the right direction. As currently proposed, this new legislation would allow borrowers to refinance their undergraduate federal Stafford loans to an interest rate of 3.86% and their graduate Stafford loans to 5.41%—the same rates available for new borrowers through the end of this June.
Starting July 1, these rates climb to 4.66% and 6.21% for undergraduate and graduate loans, respectively, so the savings would be immediate. However, going back even further, these loans had fixed rates as high as 6.8% as recently as 2008. Shaving 3% off those rates would obviously benefit these borrowers greatly.
Refinancing Private Student Loans
Another potential benefit of Warren’s bill is its proposal to allow borrowers to refinance their private loans into federal loans. Doing this would not only give borrowers the benefit of combining their entire loan balance into a single monthly payment, but it would also allow them to take advantage of repayment options (like income-based repayment) that would otherwise be unavailable to them.
Private loans currently represent only a fraction of the student loan market, yet according to the Consumer Finance Protection Bureau, they are responsible for the lion’s share of complaints when borrowers fall on hard times. Unfortunately, it seems that private loan borrowers who are already in default will not be able to take advantage of the relief available with this bill.
The Sticking Point(s)
With such great benefits for borrowers, this bill should easily gain bipartisan appeal, right? Of course, when passing legislation, things are never that easy.
One issue here is that this bill will try to pay for the program with the so-called Buffett Rule, which sets a minimum tax bill for the nation’s top earners. In the currently divided Congress, the Buffett Rule probably makes this bill a no-go for most Republicans. Plus, it is unclear if this plan would actually be able to cover the inevitably high price tag for such a significant change in student loan legislation.
In addition, the reauthorization of the Higher Education Act is supposed to occur this year (though, obviously, not by June, as Senator Tom Harkin had hoped). As has been the case in the past, Congress can postpone this process and most definitely will given the current lack of momentum in Congress, but it will do this eventually. But, as a result, changes may not take place until reauthorization happens.
As I mentioned before, reauthorization is a major event that could be politically appealing to both sides of the aisle. With that looming and legislators continuing to propose solutions, I like to think that we will see some sort of student loan refinancing in the future—even if it’s not from this bill.
Unfortunately, time is not on our side. New student loan interest rates are definitely going up on July 1. Anything to help reduce the burden for borrowers of both private and federal loans is a welcome change. Let’s hope it happens.
With the vote for this bill arriving soon, we’ll have to wait and see if it does.
(Update 6/11/14: This bill was brought to the senate floor today and failed to garner enough votes to proceed. At a press conference after the vote, Sen. Warren said, “We’re not giving up.”)