News came out recently that Senator Elizabeth Warren has proposed new legislation called the Bank on Students Emergency Loan Refinancing Act. Under this legislation students who borrowed prior to 2013 to fund an undergraduate degree to refinance both public and private student loans into a new loan bearing a 3.86 percent rate. Loans taken out for graduate school could be refinanced at a 5.41 percent rate, while parent loans could be refinanced at 6.41 percent.
The good part of this program is that it would apply not only to federal student loans, but to private loans as well. However, the devil is in the details. In order for private student loans to be included, the borrower must be in good standing with the lender and must meet certain debt to income ratios that have yet to be determined by the Department of Education. The problem is really two-fold.
First, private student loan borrowers who are in default need this the most but will be unable to get it. Those in default on private student loans often face interest rates of 29%, and they won’t be able to do a thing about it. Second, the debt to income ratio will probably keep most people out of this. It is very common for a borrower with private student loans to have over $100,000 in student loans and due to the economy they only have a job that pays $45,000 or less. Ironically, it seems that the people with the most student loan debt often have the least amount of income.
So what is the real solution? Simple. Restore Bankruptcy Protection to Student Loans. Lowering interest rates is great, but that still leaves us in a situation where students have exorbitant amounts of debt that they will never be able to pay off. This debt keeps them from fully participating in the economy by doing things such as buying houses and cars. While allowing bankruptcy protection on student loans may mean less student loans are granted, that may end up being the best thing. It used to be that someone could get a decent job without a college degree, but now that everyone has bought into the idea that they need a degree, it is almost impossible to get a decent job without one.
Ultimately, I tend to think this won’t pass anyways. Why not? Well, it would be harmful to the banks that lent the money, and the banks have a much better lobbyists than borrowers. Secondly, the government makes too much money off of student loan interest. the government will make $66 billion off of federal student loans disbursed between 2007 and 2012. Yes, Billion, with a B. If loan rates are reduced, so is the amount the government will take in. While i try not to be too cynical, I have yet to see the government do things that reduce revenues.
So, this is a step in the right direction, and it could help a lot of people, but let’s not pretend it is actually going to solve anything.