Student loan refinancing

Progressive members of Congress, left-leaning think tanks, Democratic presidential candidates, and others have over the last year been aggressively promoting student loan refinancing as a fix for the student loan problem. Careful examination of the legislation that has been put forth to this end, however, reveals that what is being promoted will not help the vast majority of student loans borrowers significantly, won’t solve any of the structural problems with student loan debt, and in fact looks more like bailouts for banks than anything else.

The legislation in question is Sen. Elizabeth Warren’s (D-Mass.) “Bank on Students Emergency Loan Refinancing Act” (S.2432).  The bill would allow student loan borrowers to refinance their loans at current rates (about 4.5 percent for undergraduate loans, 6.4 percent for graduate loans).  While this could mean a significant interest reduction for private loan holders, it would likely translate into only a couple of percent reduction for federal loans,  which comprise the lion’s share of all outstanding loans.  There is also a .5 percent fee that would be slapped onto the principle of the new, refinanced loan, making the plan even less attractive.  This plan, furthermore, would not be available to the most distressed borrowers, those in default whose loans have exploded with penalties and fees.

{mosads}There are some hidden consequences as well.  For private loan holders, the federalization of their loans- and let’s be honest, this really is a federalization plan rather than a refinancing plan- will cause them to lose vital consumer protections like statutes of limitations and Fair Debt Collection Practices rules (Don’t believe the rhetoric about federal loans having more consumer protections than private loans – this is completely false).  This could be a huge negative for these borrowers.

Also, the Department of Education, which hates to have new programs thrust upon it by Congress (like the gainful employment rule, for example) will administer the program. This bill gives them authority to decide who to let in and who not to.  If history is any guide (with the various repayment programs), they will only let a tiny trickle of borrowers participate.

For private loans, this plan looks suspiciously like a bailout for the banks. Sorry to have to say this about an Elizabeth Warren bill, but the language speaks for itself: It calls for paying principal, interest, fees, and leaves open the possibility for paying even more than this to the lenders.  Make no mistake: the private lenders would love to dump their crap-loans on the taxpayer for full-book value. These are loans that they probably wouldn’t be able to get 50 cents on the dollar for otherwise.

This essentially rewards the banks for the predatory lending practices they have been engaging in since bankruptcy was removed from the debt in 2005, and as a taxpayer this is very aggravating. As someone who has seen the bad-faith, cruel, dishonest, reckless behavior this industry has engaged in to this point, I would say it is infuriating, and quite frankly, Warren should be compelled to agree.

The bill does nothing to lower the price of college, nothing to decrease the amount of debt having to be borrowed, and nothing to address the perverted fiscal incentives that have turned this lending system structurally predatory.

The worst thing about this bill is that it is a major distraction from the urgent need to return bankruptcy protections to all student loans. Only bankruptcy will compel the return of good-faith behavior to the lending system, compel the Department of Education to kick out the horrible schools, and crack the whip on those that remain to significantly reduce their price, and improve their quality.

Warren taught bankruptcy law at Harvard for many years, and she more than most understands why Congress placed the establishment of a uniform bankruptcy system near the top of the list of the enumerated powers of Congress – ahead of the creation of a military, even!  

Congress has been re-arranging deck chairs on the student loan Titanic for over a decade, and this looks exactly like just one more distracting, time-wasting exercise by our legislators.  To see Warren and the progressives spend their time on this instead of doing what they know is right is baffling and astonishing. If they continue to neglect bankruptcy return to student loans, we can only hope that the republicans will seize this opportunity to demonstrate to the middle class that the “invisible hand” actually can work for the little guy.  The stakes are enormous and it won’t be much longer before the entire lending system loses legitimacy with the public.

Collinge is founder of StudentLoanJustice.Org and author of The Student Loan Scam (Beacon Press).

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