If ever student loans had champions in the Senate, they do with Senators Gillibrand and Warren who have both tirelessly campaigned for more favorable rates and terms for those new to the student loan market and those with existing debt. To that end, Senator Kirsten Gillibrand of New York is renewing a call for action on her Federal Student Loan Refinancing Act (S. 1066) that would allow meaningful refinancing of existing student loan balances to more competitive rates currently available.
For a few months after Gillibrand first pushed the proposed legislation, there were no co-sponsors, but now two (only two!) Democrats have waded in as co-sponsors: Ohio Senator Sherrod Brown and Connecticut Senator Richard Blumenthal. The bill was read twice and then referred to the Committee on Health, Education, Labor and Pensions. Remanded to the review of a committee is where most promising legislation goes to die, but this bill should be revived ASAP. Here’s why…
Lower Interest Rates Could Speed Repayments
Current interest rates are 3.86% on both subsidized and unsubsidized federal student loans. Loan rates from the late 1990s and forward have ranged from 5%-7.46%. Gillibrand’s S. 1066 would cap interest on the loans at 4% under a consolidation/refinance. This would make a meaningful difference in student loan payments and could allow people to fast track their loans for payoff if their monthly payments were made more affordable.
Make Consolidation an Attractive Alternative
Currently, consolidations leave your interest rate at the same or higher by applying a weighted average formula when you combine your loans. In other words, if you owe $10,000 at 5%, $5,000 at 8% and $10,000 at 6%, your total debt would be $25,000. For the two loans at $10k, they would each account for 40% of the new balance and the 8% would account for 20% while weighting. The upshot is that your consolidated interest rate would be 6%. The payments are close to what they would be without consolidating (about $277) as is the interest (give or take a few bucks here and there).
Here’s the math for those of you who dig that sort of thing:
40% of your old 5% rate = .40 x 5 = 2%
40% of your old 6% rate = .40 x 6 = 2.4%
20% of your old 8% rate = .20 x 8 = 1.6%
Total that all up together and it’s = 6%
The only upside to a consolidation at this point is to get your loans out of default or to have only one payment going out each month. There’s no real benefit to it. The interest rate your loans were written at are the ones you’re stuck with until the loans die (or you do). But Gillibrand’s legislation would change all of that.
How the Refinance Consolidation Would Benefit Debtors
Under S. 1066, loan rates would max out at 4% for any with interest rates in excess of 4% and for loans written at less than that benchmark, the consolidation would be at the lesser of the weighted average of interest or a rate equal to .4% of the outstanding principal at the time of consolidation. If an FFEL is involved, there’s some additional language and terms to contend with.
But given the same scenario as above, the whole $25,000 would be at 4% under this new plan, since all of the interest rates exceed the 4% benchmark. If you consolidated under a 10 year plan, your payments would drop by about $25 per month and you would save nearly $3,000 in interest. That’s enough to make a difference in your life.
Plus consider the power of additional payments and what would happen if you kept on paying that $25 each month but applied it toward interest. You would pay off your loan 13 months earlier and would save another $610 in interest. That’s a marked overall savings that would mean getting you out of debt faster, more money in your pocket and less in the coffers of the federal government. Contact your Senators and tell them to push for S. 1066 today!
If you’re still muddling through your original student loans, have consolidated or have a mix of federal and private loans, sign up now for Tuition.io’s free student loan tool to manage all of your student loans in one easy dashboard. You can view individual loan balances, your aggregate debt, track the progress over time of payments and investigate the impact on your debt of making additional payments or of switching between available repayment plans. Also be sure to check out our blog for posts on coping with student loan debt and for updates on legislation.