Bill Would Allow Students to Refinance Loans

Massachusetts Senator Elizabeth Warren wants to make student loans similar to loans on a car. Unlike an auto or home loan, student loans cannot be refinanced. This means that student loans have turned into a way for the government to generate revenue. Between 2007-2012, the government profited $66 million from student loans.

Warren told The Daily Beast that she is discussing legislation with colleagues that would allow students to refinance their federal loans at rates currently offered to new borrowers. The legislation will be introduced in the coming weeks as Warren continues to work with other senators from both parties on the exact language.

Warren sees the $1.2 trillion in student loan debt as a big problem, and has been working on ways to reduce it.  She also says that the fact the federal government makes huge profits on the loans “does not reflect our values” and is a threat to economic recovery.

Daily Beast reporter Ben Jacobs shared that this is not the first time the senator has fought for changes in student loans. In 2013, she led a fight against the Bipartisan Student Loan Certainty act that allowed the interest on future student loans to float freely at market rates instead of facing a government cap. Her goal now is to apply those same principles to existing student loans. She says with current interest rates around 3% refinancing would make a big difference to those paying a higher interest rate.

The obstacle is how would the reduction in interest rates be paid for? There is a significant cost when allowing students to refinance, although without a bill there is no way to know the exact cost. Warren is not concerned about this though saying there are “millionaires and billionaires who can take advantages of major tax breaks and major corporations that pay zero taxes” and that they can make up the revenue gap.  A tax increase like that would be unlikely to pass the senate or GOP-controlled House.

Neal McCluskey, a higher education expert at the libertarian Cato Institute, could find no objections to Warren’s proposed bill,

Instead, he was agog at the issues involved with reducing government revenue through lowering interest rates because the lender has to pay for it and, in this case, the lender is the American taxpayer.

The proposed bill seems to summarize the free market principles essential to the recent student loan compromise. Logically speaking, if rates at which students can borrow from float freely like all other interest rates, then students should be able to refinance these freely. The problem is that this would cost Washington money. The federal government is projected to make $185 billion off student loans in the next ten years.