Warren’s Plan to Refinance Federal and Private Loans

Michael Lux Blog, Lower Payments, News, Student Loans 0 Comments

Today Senator Elizabeth Warren (D-Mass) introduced legislation that would allow people with student loans to refinance their student debt in a manner similar to how people refinance their car loan or their mortgage.  If your student loan interest rates are higher than what they would be if you took out a loan now, Senator Warren and company want you to be able to get that rate lowered.  While this sounds like great news for borrowers struggling with student loans, there plenty of flaws in this proposed legislation.

Where this legislation gets interesting is Warren’s plan to refinance private loans through the department of education.  Presently, no such program exists.  Should this bill become law, students with outrageous private loan interest rates could lock down lower federal rates.

In Senator Warren’s words:

“Allowing students to refinance their loans would put money back in the pockets of people who invested in their education. These students didn’t go to the mall and run up charges on a credit card. They worked hard and learned new skills that will benefit this country and help us build a stronger middle class and a stronger America.”

Allowing students to refinance their government student loans at a lower interest rate would limit the current government profits on student loans.  To finance this loss of income, the bill would enact the “Buffett Rule”.  The Buffett Rule creates a minimum tax for individuals making over One Million Dollars per year.

Warren’s Proposal and Student Loan Forgiveness

Further details on the language of the loan has not been widely reported, however the full text of the bill does show other interesting bits of information.  If students refinance their private loans into federal government loans, these new refinanced loans would not be eligible for public service loan forgiveness.  Should this bill ever become law, people in public service positions and those with forgiveness aspirations will have some very difficult analysis in their future.

Helping those who need it most?

A recurring theme of the push behind this legislation is helping those students who need it the most.  However, students who need the most help with their private loans will be out of luck.  The bill specifically states that students in default or who have not made six consecutive on-time payments will not be eligible.  The bill also calls for an analysis of borrowers debt-to-income ratios to determine eligibility.  In theory, someone who has made all of their payments on time could still be denied this government refinancing.

Many borrowers hoping for the solution to their private student debt problems may be very disappointed by the fine print of the bill.  For those interested, the most realistic way to view this bill would be to consider the Department of Education as another company in the private student loan consolidation/refinancing business.  It might help some, but not all.

What are the bill’s chances of passing?

Because of the highly controversial Buffett Rule being used as a method to pay for the legislation, this bill is pretty much dead on arrival.  This seems to be classic election year politics at play.  It appears this bill is nothing more than a tool used by the Democrats to provide ammunition to use against their Republican opponents in November.