When interest rates go down, many people with outstanding loans — house, car, home equity — start looking around at refinancing options. Unless your debt is a student loan, in which case federal law places you in a different category from the rest of the borrowing public and sticks you with the original loan rate.
The Senate on Wednesday is expected to take up Massachusetts Democrat Elizabeth Warren's proposal to fix that. The Bank on Students Emergency Loan Refinancing Act (SB 2292) is a fine and fair idea, but Warren's bill would impose a minimum tax on the wealthiest Americans, an approach that has stirred opposition and makes it a long shot to pass. Which is too bad, because the measure could help those saddled with student loan debt and add some juice to the economy.
In a related effort, President Obama announced Monday an expansion of the Pay As You Earn option that will let nearly 5 million more people with student loans limit their monthly payments to 10% of their income. That option already is available to debtors who borrowed money after 2012, when PAYE began; the expansion would extend it to those who got their loans before that.
Both measures are positive, justified steps to ease the financial pinch from student loans. It's a significant issue, propelled by three decades of stagnant family incomes while average tuition at a four-year public university tripled (problems that, unfortunately, neither of these measures address).
Today some 40 million people hold student loans totaling more than $1.1 trillion, a debt level larger than that of the nation's credit card holders. About $1 trillion of the outstanding student loans is owed to or guaranteed by the federal government, and an additional $100 billion or so was borrowed privately from banks. Those are big numbers. On a more digestible level, the Institute for College Access and Success estimates that 7 of 10 college seniors in 2012 had student loan debt, owing, on average, $29,400.
For years the federal government tied the interest rate to Treasury bills, but in 2006 fixed the rate for subsidized and unsubsidized need-based Stafford loans at 6.8%, then gradually lowered the subsidized loan rate to 3.4%. Rates for graduate student loans were higher.
Last summer, Congress recast the formula for the rates, which set them for the 2013-14 academic year at 3.86% for undergraduates and 5.41% to 6.41% for two types of graduate-student loans. Warren's bill would allow those with higher rates on older loans to refinance at the current rates. And it would let those with private loans, as long as they are up to date with their payments, refinance through the government program. The Congressional Budget Office predicts that about $460 billion in debt would get refinanced at a cost of $61 billion in expenses and lost revenue from lower interest payments.
To offset that, Warren wants to implement the so-called Buffett Rule, raising taxes on people earning more than $1 million a year. Whatever the merits of such a rule, it is likely to be a deal-killer in the Senate, where Republicans would be sure to filibuster it, and certain to go down in the House, where Republicans hold a majority and are committed to opposing new taxes.
What that means is that right now, at least, Warren's bill won't graduate. Warren should work with her colleagues to find another funding mechanism they can support, and enact this bit of relief.Copyright © 2015, Los Angeles Times