Guest Article by Andrew Rombach
The cost of attending college has risen exponentially to the point where a majority of students need to take out some form of student debt to pay for their education. The average borrower from the Class of 2017 had $28,288 in student loan debt. Nationwide, the student loan debt toll stands at $1.5 trillion — and rising.
This level of student loan debt impacts the financial futures of young adults considerably. When saddled with high student loan payments, many college graduates put off buying homes, saving for retirement, and making major purchases. Many think these trends have a major impact on our economy — which has made politicians take notice of this issue. And some have called for change.
United States Senator Elizabeth Warren (D-Massachusetts) tried tackling this problem head-on with a bill that would have re-shaped the student loan industry. The Bank on Students Emergency Loan Refinancing Act was originally introduced in 2014, but it ultimately failed. Its reintroduction in 2017 signaled another attempt at a potential solution for students struggling with high interest rates on their federal and private student loans.
What Is the Bank on Students Emergency Loan Refinancing Act?
In 2014, federal student loan rates were approaching new lows, but many older borrowers were stuck with historically high rates from previous years. The Bank on Students Emergency Loan Refinancing Act was introduced by Senator Warren as a way to immediately reduce the interest rates on federal student loan borrowers who were stuck with those rates.
Why was this needed? Although the federal government is the largest student loan provider, it does not offer any student loan refinancing option. As mentioned, many borrowers were stuck with high interest loans and limited options to save money.
While borrowers can refinance their student loans through private lenders, there are several limitations to consider. After refinancing, federal protections and benefits such income-driven repayment or student loan forgiveness options are no longer available. On top of this, refinancing with a private company is typically hard to qualify for due to credit and income requirements.
The bill proposed by Senator Warren addressed this issue in two key ways. First, it would allow eligible borrowers to refinance their federal student loans through a federal refinancing program. For example, borrowers with Direct and Federal Family Education Loan (FFELP) loans would have been able to refinance to the lower interest rates of 2013-2014.
Second, borrowers who were in good standing would have been able to refinance private student loans through the same federal program and receive the 2013-2014 rate. Any private student loans refinanced into federal student loans would be given all of the protections of the federal student loan program.
Gauging the Impact on the Industry
If enacted, the option to refinance private student loans would have had a major impact on the private student loan industry overall. Eligible federal and private student loan borrowers would likely have wanted to take advantage of the lower rates and benefits offered by the federal government. This probably wouldn’t have eliminated the private refinancing industry, but it likely would have significantly curtailed the number of people who banked on private student loan refinancing.
It would have been interesting to see how this bill impacted the in-school private loan industry. It’s easy to assume the program would have been utilized to a large extent since federal student loans offer enticing benefits. In just one scenario, a private loan borrower could have refinanced his or her student loans with the government and opted for an income-driven repayment program afterwards. This is a repayment option completely unavailable to private loans today.
What Are the Chances of this Bill Becoming Law?
The Bank on Students Emergency Loan Refinancing Act was originally introduced in 2014, where it did not move forward. Senator Warren re-introduced the Act in 2017 with broad support from her fellow Democrats. It currently is in the Senate Finance Committee awaiting a vote, but it has not progressed to the House or Senate floor.
Bills such as the Bank on Students Emergency Loan Refinancing Act are incredibly difficult to pass. It would reshape how the Department of Education handles student loans. It is sure to face stiff opposition from the banking industry because it allows borrowers to transition private student loans to the federal government. Presumably, this would reduce result long-term profits in the private student loan industry. For these reasons, it is unclear if this bill will become law.
While the Bank on Students Emergency Loan Refinancing Act is an interesting idea, it is too early to know if it will ultimately become law. Until that time, borrowers should keep working to pay down their student loan debt.