Special-interest legislation doesn’t get much more obnoxious than the bill now making its way though Congress to clamp down on students and former students who want to refinance their loans at lower interest rates. They are about to be severely punished for seeking not only an education but a debt-free life afterwards.
While homeowners can refinance their mortgages as often as they want and relieve themselves of high-interest debt when rates cycle downward, student and former-student debtors are only permitted to refinance once for the lifetime of the loan! And now the House is considering legislation that would stop students who are in school from keeping their current interest rate of 4.75 percent and would instead force them to pay 7.9 percent, creating a lifetime burden entirely unjustified by the lending market.
Many students are locked into rates that approach 9 or 10 percent, reminders of the grim economic days of the early 1980s, and find themselves with no flexibility. Frequently, students use their once-only refinancing option shortly after graduation and find themselves helpless as the market interest rates drop ever lower.
Home-mortgage refinancing, often similarly guaranteed by Fannie Mae, has become a huge industry and has given many families alternatives to bankruptcy as they face huge debt burdens. But student loan refinancing — beyond the one shot now permitted — is blocked by special-interest regulation and legislation.
The legislative efforts by special interests reflect the power of the once quasi-public body Sallie Mae (Student Loan Marketing Association), which has now cut off all connection with the government and instead become a profit-making company unrelated to the government called the SLM Corp.
With a 25 percent share of the student loan market — more than six times that of its rivals — SLM has cashed in on federal guarantees against defaults on the one hand and blocked student refinancing on the other. As a result, according to columnist Terry Savage, writing for thestreet.com, SLM has made a profit of 1 percent over its loan volume of $100 billion — $1 billion in profit!
Since student loans constitute one-quarter of all outstanding loans, SLM has huge market power that it has not hesitated to translate into political clout through campaign contributions that water and nourish the Republicans who control the legislative process. In all, the SLM PAC contributed almost $140,000 to the members of the House Education and the Workforce Committee to lock in their preferential treatment.
Once SLM abandoned its federal charter and went into business for itself, this public-private hybrid should have lost its quasi-governmental status and been forced to compete in the private marketplace like anyone else. All regulations restricting refinancing or consolidation should be repealed. If there was ever an area in which the Republicans should effectuate their rhetoric and deregulate, this is it.
Student loans are the shackles that most young people take into the rest of their lives after leaving school. Keeping this debt hangover large and rendering it inflexible is about as anti- family a policy as you can get, forcing young people to postpone starting families because of the load of debt with which they begin life burdened. Yet it is the Democrats, led by Sen. Ted Kennedy (Mass.), who are most vociferous in battling for deregulation.
For President Bush, desperately seeking traction with which to regain his popularity, a crusade on behalf of student debtors, announced in his State of the Union speech, might be just the ticket. He could help himself get out of political red ink by mitigating the financial red ink in which an entire generation finds itself mired.
Morris is the author of Rewriting History, a rebuttal of Sen. Hillary Rodham Clinton’s (D-N.Y.) memoir, Living History.