Politico reports that Senator Elizabeth Warren’s student-loan “refinancing” bill, which suffered death-by-filibuster back in June, will be resurrected in the Senate as early as this week. The legislation would drop the interest rate students are paying on older loans from around 7 percent to about 4 percent, which is the rate the government charges for newer loans.
That’s a transfer payment from taxpayers to people who have attended college. But Senator Warren insists her bill merely levels the playing field by granting students the right to refinance. “With interest rates near historic lows, homeowners, businesses and even local governments have refinanced their debts,” she wrote in an op-ed on Tuesday. “But a graduate who took out an unsubsidized loan before July 1 of last year is locked into an interest rate of nearly 7 percent.”
As I noted last spring, students already have the right to refinance their loans. They can go to any private lender and ask for a lower rate, just as homeowners and business can. The reason that few students do, of course, is that they are getting a great deal — a generous government subsidy — on their existing federal-direct or federally guaranteed loans. Private lenders are rarely in a position to offer better terms.
The Warren bill would allow students to refinance with the federal government, but why should taxpayers agree to accept lower interest payments? In the private sector, lenders will allow refinancing only if they fear losing loans to their competitors offering lower rates. But the federal government, which charges below-market interest rates, has no serious competition for student loans.
It’s not unreasonable to believe that student debt is excessive, and lowering the prior interest rate would be one way to relieve the burden. But when Senator Warren says her bill merely puts students on a refinancing par with homeowners and businesses, it does the whole student-loan debate a disservice.