The Agenda

Attention, Elizabeth Warren: Students Are Already Free to Refinance Their College Loans

A new bill championed by Sen. Elizabeth Warren would allow holders of student-loan debt to refinance with the government at a lower interest rate. The “Bank on Students Emergency Refinancing Act” would drop the rate on existing college loans to the current rate on federal loans, roughly 4 percent — a large reduction for students who took out loans for around 7 percent before the 2008 recession.

Supporters portray the bill as simply leveling the playing field: “Homeowners and businesses are often able to refinance their debts. Students should be able to do the same,” according to Representative John Tierney, a sponsor of the House version of the bill. “It is outrageous that students can’t refinance at these historically low interest rates,” added Senator Barbara Boxer. “This legislation gives students the same fair shot as other borrowers have when interest rates decline.”

There’s a problem with that thinking: Students are already free to refinance their college loans. Most of the existing loans are federal-direct or federally guaranteed. Students can take them to any bank of their choosing and ask for a lower interest rate, just as homeowners and businesses can. The reason they don’t is that no private-sector bank is willing to take full responsibility for those loans at a lower rate — or even at the existing rate. The loans are not profitable for private lenders without taxpayer money to prop them up. In other words, students are already getting a great deal on federal loans, it’s just that some are not getting as great a deal as Senator Warren and her cosponsors would like.

The new bill would allow students to refinance with the federal government. But why should the government allow refinancing when it faces no competition? When homeowners ask their mortgage lenders for a lower rate, the lenders will comply only if they fear losing the loans to a competing lender. But the government, being willing to lose money on student loans, has no serious competition in the marketplace.

Senator Warren’s bill does not “level the playing field” or address any structural unfairness. It would simply increase the government’s transfer payments to people who have attended college. 

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