Pelosi Fumbles on Student Loans

Michael Lux Blog, News, Student Loans 1 Comment

Following the President’s big announcement on the Student Aid Bill of Rights, members of Congress have been active with new proposed legislation.  A few days ago 13 Senators announced plans to bring bankruptcy back to student loans.  Today, House Minority Leader Nancy Pelosi jumped into the fray.  Unfortunately for student loan borrowers, the proposed legislation has little chance of passing, and even if it did, it would offer little help to most borrowers.  Worst of all, the biggest winner in the legislation might be the private lenders.

The Plan

Pelosi is calling for legislation that would allow borrowers, of both private loans and federal loans, to refinance their loans with the federal government at interest rates ranging from 3.8% to 6.4%.  The bill would be funded by implementing the Buffet Rule, an increased tax on the super wealthy.

Unfortunately, there are a number of problems with this idea.

Problem #1: Little Chance of Passing

The Buffet rule dates back to 2011 when it was first proposed by President Obama.  Since that time it has been suggested to fund a number of different proposals, but has never passed.  By including the Buffet Rule as a funding mechanism, Pelosi effectively guarantees that the bill will never pass as Congressional Republicans, and many Democrats, are opposed to the measure.

The reality is that a bill like this makes for great campaign speeches, but is pretty much dead on arrival.  Pelosi and the Democrats may use the legislation to boast about their attempts at removing “the anvil” of student debt, but this effort falls far short of the mark.

Sadly, even if the bill did somehow pass…

Problem #2: Little Help for Borrowers

Lowered interest rates on student loans is definitely a great thing.  In the short-term, legislation like this could make the student debt burden of many families a little lighter.

Unfortunately, the core issues surrounding student loans would still remain.  For people who have fallen behind or defaulted on their student loans, dropping the interest rate from 7.9% to 6.4% doesn’t really change their situation.  For families planning for the future, this bill will do nothing to reign in the rising cost of a college education.  At best it is a band-aid on a gaping wound.

Problem #3: A Bailout for Private Lenders?

If this bill ever became a law, the private lenders might actually end up being the biggest winners.

The most helpful part about this legislation is that it could help borrowers struggling with their private loans the chance to get on a federal repayment plan.  While this would be a win for those borrowers, it would also be a huge win for lenders.

If a borrower can’t make the payments on their private loan, savvy lenders could reach out to the borrower and share with them information on the new program.  If the borrower refinances or consolidates their loan with the federal government, they get the benefit of federal repayment plans… and the lender still makes money on a loan that might have otherwise become bad debt.  Essentially, private lenders could keep their profitable loans, and shift the burden of loans that might never be repaid to the taxpayers.

The Bottom Line

The recent attention student loans have gotten in Washington, D.C. is definitely a good thing.  While there have been some exciting proposals, this latest effort from Pelosi is not one of them.