The more things change, the more they stay the same.
That expression is the first thing that came to mind when I read the Student Loan Relief Act of 2015 (S.2099), which was recently introduced by Sens. Kelly Ayotte (R-N.H.) and Shelley Moore Capito (R-W.Va.).
Essentially, the bill proposes to pave the way for federal student loan borrowers to refinance their presumably higher-rate, publically financed debts with potentially lower-rate private-sector loans at no cost to taxpayers.
Sounds fabulous. If only it were true.
Let’s start with the wording in Section 102(a)1, which speaks to the rates that student-loan borrowers can expect to pay when they refinance their Federal Direct and FFEL loans. It reads: “… to ensure that borrowers pay lower interest rates that are commensurate with credit risk.”
Commensurate with credit risk?
That doesn’t quite square with Section 102(a)3, which states that the “… private loan that results from refinancing under a program established under the authority of this section shall receive a Federal Government guarantee of 95 percent of the private loan, including accrued interest on such loan.”
If the government continues to backstop these debts well after the time the contracts leave the Department of Education’s balance sheet, why should the borrower’s creditworthiness come into play? For the 5% risk that the private sector is being asked to bear on loans that are virtually impossible to discharge in bankruptcy—loans that may end up being paid through the garnishment of the debtor’s Social Security benefits?
Clearly, this wording opens the door for private-sector lenders to impose whatever pricing they have in mind. There is also nothing to prevent them from pitching lower-cost variable-rate loans to borrowers who happen to have higher-rate, fixed-rate loans — that is, until interest rates begin to escalate. And what’s to stop lenders from demanding loan co-signers too?
Seems to me that what Sens. Ayotte and Capito are really proposing is a backdoor resurrection of the Federal Family Education Loan program—a program that was discontinued in 2010 in favor of the less costly Federal Direct program—where many of the loans ended up in private-sector-sponsored securitizations, with relief-seeking borrowers at the mercy of servicers that are beholden to the investors who pay their wages. The really big difference this time around, however, is that the banks get to set the interest rates.
And then there is Section 102(a)2, which is entitled “No Net Cost to Government.”
I suppose that could be true, since one way or another the feds are guaranteeing these loans. On the other hand, though, the government is currently generating more than $40 in profits through this lending program.
Call that number what you like—“astounding,” “obscene” or “unsustainable” because, after all, how long will the government be able to continue borrowing at 0% interest?—but cash is fungible, which means that these profit dollars, when added to all other governmental revenues, end up offsetting an equal amount of federal deficit.
So considering the risks that are associated with variable-rate loans, the potential for more stringent contractual terms and conditions, the fact that the government is still on the hook for these debts with less money to show for it, I can’t see how this bill is anything but a sweetheart deal for private-sector lenders.
If lawmakers are hot to trot to pave the way for something to address the student loan problem, they should pass legislation that permits all federal student-loan borrowers to refinance their unpaid balances at prevailing undergraduate rates for terms of up to 20 years.
Not only is it difficult to understand why, arguably, more creditworthy borrowers (e.g., graduate students and parents) are forced to pay extra, but it is equally nonsensical to continue a frustratingly inefficient relief-granting process that doesn’t yield any better outcome.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
More on Student Loans:
- Can You Get Your Student Loans Forgiven?
- How to Pay for College Without Building a Mountain of Debt
- Strategies for Paying Off Student Loan Debt