Senator Warren’s bill failed to gain enough support to move on from the Senate. Now that it’s dead, let me tell you why I’m glad for that.
This bill is a bad idea. It does little to help already struggling borrowers, and hurts more than most folks realize. Further, with President Obama’s recent executive action last week, this bill does even less than before the announcement.
What was the Bill about?
The bill’s main focus was refinance. It would have allowed federal loans to be refinanced at lower rates. You can get details in my past blog about the bill. Not all folks would have received a lower interest rate, which means there are a fair number of folks who gain nothing. Another interesting piece of the bill would have allowed private student loans to be refinanced into federal loans. The benefit would have been lower interest rates and affordable repayment plans. However, the bill was doomed from the start because of the way the bill financed the refinances – tax on the wealthy. This is such a hot button that there was no way this bill was going anywhere. That’s not my political view, it’s a political fact.
The obvious problem is that this bill does not address or even hint at the root of the problem, the loans themselves – why are they needed. This bill MIGHT make loans more affordable, but there are programs out there already, which significantly weakens the interest rate affordability argument.
Undergraduate Federal Loans
Undergraduate Stafford loans are capped for each year of attendance. A four-year graduate can have, at most, $27,000 in Stafford loans. Even at the highest interest rate of 8.25%, over 10 years the payment would be $332. Over the past few years, the interest rate was under 4%, creating a payment of $273. That’s a car payment for most folks. Undergraduate loans are not the problem, you’ll see why in a minute.
Graduate Federal Loans
Graduate Stafford loans are capped at $20,500 per year! In addition, graduates can have uncapped graduate PLUS loans. It is easy to see how graduates have loan balances of $50,000, $100,000, even $250,000 in just federal loans. If we low ball this and look at a borrower with a balance of $80,000 (remember $27,000 is from undergrad) and assume a low 4% interest rate, the 10-year payment is a whopping $810 a month. This borrower could stretch the term out to 25-years, dropping their monthly payment to $422. Unfortunately, there are quite a number of borrowers who can’t afford this.
Income Driven Repayment
Enter income driven repayment. Here, the balance of the loan is not a factor; only the borrower’s income and family size matters. Take a fresh undergraduate Graduate. Their first job may well be in the fabulous world of retail (I did it, no shame there!) with an amazing pay of $10 per hour! That’s $400 a week or $20,800 gross per year. Thanks to income driven repayment, this borrower’s payment is only $41 a month. Do we care about interest? NO, because if the loan isn’t repaid in 25-years (it could happen with today’s economy), the balance is forgiven.
Consider the graduate Grad with $80,000 in loans. Assume a family income of $65,000 and a family of 4, the income driven repayment is $365, less than the 25-year term repayment. Again we don’t care about interest, the loan is forgiven if not fully paid in 25-years.
Obama’s plan weakens Senator Warrent’s bill even more because it takes income driven repayment and makes it even more affordable. The borrower who was paying $41 would pay only $27 under Obama’s plan. And the other borrower paying $365 pays only $244 with Obama’s plan. Interest? Who cares! The government writes it off! Didn’t Senator Warren say the Government shouldn’t be profiting from student loan borrowers? It can’t with the income driven repayments. Before you get all conservative, think what this does for the economy. More money in pocket means increased GDP. Houses, cars, large consumer goods would start moving again.
The Unseen Problem
The largest problem I have with Senator Warren’s bill is the debt swap – refinancing private student loans. This is yet another bank bail out, something Senator Warren never supported. But that is exactly what this clause is. And here is the biggest danger of this. Allowing private loans to become federal loans takes the pressure off of the movement to allow private student loans to be discharged in bankruptcy, as they were before the 2005 bankruptcy code changes. I don’t like that. Worse, the debt swap would only be allowed for a limited time. After that, new folks will be stuck with private loans and all the negative consequences. No, don’t use fed money for a bail out (band-aid). Allow bankruptcy and let the creditors suffer for refusing to work with borrowers and extending credit when it shouldn’t have been. Obviously lenders haven’t learned a thing from the mortgage crisis.
I know people will have an issue with this. They’ll want to know why I don’t support federal loans also being allowed discharge in bankruptcy. Truth is, I do support it, but I also know it takes baby-steps to make change. The easiest change to get done, right now, is allow private student loans to be discharged again. It doesn’t cost tax money, why protect private banks? Once we get that change, we can work on more.
Want other changes, like making college affordable? To do that, we need to understand why college costs so much in the first place. That’s for another blog. Bottom line, if you want to fix the system, you have to fix the folks that can make the changes – Congress. It’s election time folks, time to make a difference.