With more than seven million student loan debtors now in default and more falling behind all the time, legislative measures to effectively address this crisis would be welcome. One such measure – Senate Bill 2292 – has been presented by Elizabeth Warren and 29 cosponsors, but the Department of Education is throwing up roadblocks. To put it nicely, this is not cool. Really not cool. And it’s none other than Arne Duncan, Secretary of Education, that’s leading the anti-refinance charge, but the whole of the DOE seems to be following his lead.
Today we’ll take a look at the bill and how it could help struggling borrowers and how the DOE is obstructing this meaningful piece of legislation.
S 2292 – Bank on Students Emergency Loan Refinancing Act
Warren’s bill is cosponsored by 28 other Democrats and one independent. Essentially, S 2292 would allow certain federal student loans to be refinanced at more advantageous rates. Loans prior to July 2013 would be reissued at lower fixed interest rates. The reissued loan would be subject to an administrative fee of no more than .5% on top of the unpaid balance, accrued interest and any late fees that have been incurred.
Borrowers would have to be below a specified debt to income ratio to qualify – that ratio is not defined in the bill and would be determined if/when the bill gains passage. What’s most interesting is that borrowers could also refinance private student loans under this federal program, but the bill specifies that a private loan converted to federal would not be eligible for discharge under programs like Public Service Loan Forgiveness (PSLF).
The bill also addressed IBR forgiveness, specifying that payments made prior to the issuance of the refinanced loan will count toward the 25 years of payments necessary for discharge of balance along with payments made after. For private loans refinanced as federal under this program, the borrower can enroll in IBR but only payments made on the new federal issued loan count toward the 25 years.
Concessions Made to Gain Republican Buy-In
Last session, Warren proposed a refinance proposal that would allow struggling borrowers to refinance at the lower Fed Funds rates (plus a little extra) that banks can borrow at. That bill failed to gain momentum, so this time Warren set the interest rates for the bill at the current rates that were approved by both Democratic and Republican lawmakers.
These are 3.86% for Direct Loans, 5.41% for graduate Direct Loans and 6.41% for PLUS loans. Warren said, “I start with the fact that nearly all of the Republicans voted to reduce the interest rate on new loans last summer. This bill picks up exactly the same (interest rate) numbers they voted for and says let’s use this to refinance all loans.” The bill also addresses limitations on high income borrowers seeking to use the program and specifies that it would be deficit neutral.
How the Department of Education Is Roadblocking
First, when the legislation was under development over the past many months, the DOE would not participate in the process, nor share data to inform the crafting of the legislation. Some of the information requested by legislators that the DOE has refused to provide includes how much the bill would impact the deficit, how many borrowers would be eligible for the refinance and how much they could save based on their current interest rates versus the proposed.
In fact, the Department of Education rakes in billions of dollars each year from student loans and this bill would cut into funds that Arne Duncan controls. No bureaucrat likes to lose money from their department. Duncan and other DOE members have told supporters of the legislation that the bill would cost too much and they would have to cut Pell Grants as a result, effectively demonizing the proposed legislation.
It will be interesting to see how this bill fares. It’s very middle-of-the-road and shows a serious effort to compromise to forestall Republican objections. Because the interest rates reflect current ones, opponents to the bill may have a hard time justifying a no vote when so many borrowers are struggling and it’s significantly impacting our economy. The bill is slated for a vote sometime around Memorial Day.
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