This morning, the Senate tabled a proposal by Elizabeth Warren to let holders of all student loans lower the interest rates they pay to the current rate offered on new federal student loans. A vote to end debate on her bill failed in the Senate, 38 votes to 56 (60 are necessary).
Senator Waren bills the legislation as giving student-loan borrowers the opportunity to “refinance” their debt just like holders of any other loans can, but this isn’t what she’s proposing: When interest rates drop, competition forces private-sector lenders are compelled to offer borrowers the opportunity to refinance their ordinary loans. Warren is trying to bolt this logic onto federally subsidized student loans, and it doesn’t add up.
Students can refinance their loans if they want already, but for almost all of them, the only lender who will offer a lower rate is the federal government. Interest rates have dropped since, say, holders of student loans issued in 2007 took out their original loans — but they took out their loans at heavily subsidized rates that no private lender would offer without federal intervention, and Warren is just proposing to lower their payments even more. (See more on this from Jason Richwine at the Agenda.) She would have paid for this big transfer to holders of student loans with a version of the Buffett Rule, which would impose a minimum tax on high earners.
President Obama endorsed the bill on Monday in his remarks on student loans, but it appears to be dead for now (though Majority Leader Harry Reid lamented its failure). The president is planning to lower the payments required of people with student-loan debt, though: He’s going to change Department of Education regulations to make existing borrowers eligible for income-based-repayment programs, which cap payments at a certain percentage of income and then forgive the debt after a certain term. But these programs are already available to lots of borrowers and yet default rates on these loans are still high — it’s partly because people aren’t savvy enough to enroll in them. The big repayment-program beneficiaries are borrowers with extremely large loan balances, and plenty of beneficiaries have relatively high incomes — 10 or 15 percent of income may sound like a lot to devote to student loan payments, but it’s calculated, for one, as a percentage of adjusted gross income (after retirement contributions, medical expenses, etc.). The president’s proposal worsens these problems, by just making the existing programs more generous to entice people to enroll in them.
So a better plan, as NR’s editors recommend today, is to do away with the loan-forgiveness aspect of the income-based-repayment programs — so that people are still held to account for the full size of their loan balances — but automatically enroll borrowers in them.