“In my view, if you can refinance your home today for 2, 3 percent, why the hell are we paying 8 or 10 percent interest rates on student debt?”
— Sen. Bernie Sanders (I-Vt.), campaign rally in North Las Vegas, Dec. 28, 2015
“You have families out there paying 6, 8, 10 percent on student debt but you can refinance your homes at 3 percent. What sense is that?”
— Sanders, post on Twitter, Dec. 26, 2015
“It makes no sense that students and their parents pay higher interest rates for college than they pay for car loans or housing mortgages.”
— Sanders, post on Twitter, Oct. 15, 2015
This Sanders line drew applause during his campaign rally speech, but led to much criticism on social media and online commentary in the following days and weeks. When Sanders repeated the claim at the December rally, readers asked us to look into his comparison and a subsequent explanation by @BernPress, which appeared to be a Twitter account affiliated with the Sanders campaign:
Student loans are secured by the federal gov't, and are even less risky than mortgages. @BillKristol please study economic 101.
— Bernie Press (@BernPress) December 27, 2015
Note: This is not an official account or any account associated with the Sanders campaign. We reached out to his staff to get a better understanding of his comparison, which we will examine below.
Sanders’s campaign cited lenders’ advertisements of mortgage rates at 3 percent or less for 15-year mortgages. The 15-year fixed-rate mortgages averaged 3.09 percent in 2015, according to the Freddie Mac Primary Mortgage Market Survey. At its lowest, this rate was 2.66 percent in late 2012.
But most mortgages are 30-year loans. The 30-year fixed-rate mortgage averaged 3.9 percent in 2015 (and it could reach 4.7 percent by the end of 2016). Although Sanders cites “2, 3 percent,” 30-year loans have never been as low as 2 percent. The lowest they ever got was 3.35 percent in late 2012.
Freddie Mac’s survey uses rates from borrowers with pristine credit, so the rate would be higher for those with credit problems, said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute.
Interest rates for student loans are calculated in ways that are not comparable to mortgages. The student loan interest rate varies on the type of loan (undergraduate, graduate/professional, parent), additional fees, the year the loan was disbursed, and whether the loan was consolidated (and at what interest rate). Student loans disbursed between 2006 and 2015 had interest rates from 3.4 percent to 8.5 percent.
You can see just how varied the rates can be from year to year, using Table B-5 in this 2013 Congressional Research Service report. Take the Stafford loan, the most common federal student loan, as an example. The interest rate was as low as 3.37 percent in 2002-03, to as high as 8.25 percent (the cap) in the mid-1990s. Since 2006, Stafford loan interest rates have been capped at 6.8 percent.
In short: Depending on the type of loans and years you choose, the comparison between mortgage and student loan interest rates is not as dramatic as Sanders portrays it.
Here’s a comparison of the two rates that does not support Sanders’s argument: 30-year average fixed rate for 2015 (3.9 percent) vs. the lowest interest rate (4.29 percent) for federal loans disbursed in the 2015-16 school year for an undergraduate degree. The difference between the two is not even one percentage point.
Further, some federal student loans have a fixed interest rate of 5 percent. And that’s just over one percentage point higher than the 30-year average mortgage rate.
Interest rates for parent borrowers have been as high as 14 percent, said Warren Gunnels, senior policy adviser for the Sanders campaign. The more loans you take out, the more interest piles up, and trying to consolidate multiple student loans into one loan drives up your rate, he said. Under Sanders’s proposal, borrowers will be able to refinance or consolidate their federal student loans into interest rates of 2.3 to 3.1 percent, depending on the loan.
“Unlike mortgage debt, except under extreme circumstances — total disability or death — federal student loans cannot be discharged,” Gunnels said. “In addition, the government can garnish wages, tax returns, and social security benefits to support the collection of student loan debt.” (These are policies that Sen. Sanders strongly opposes and would seek to change as president.)
But these two loans are apples-to-oranges comparisons. Here’s one major difference: Your home is collateralized and student loan debt is not. This lack of collateral makes the student loan more risky than a loan for a home.
“Mortgages are secured by collateral that can be seized by a lender (foreclosure) and sold. Same with an auto loan,” said David Wessel, director of the Brookings Institution Hutchins Center on Fiscal and Monetary Policy. “A student loan is different. A lender can’t seize the education and sell it to someone else, and a lender can’t put a deadbeat borrower into slavery.”
Students actually can refinance their loans with private companies such as SoFi, which are offering lower interest rates than the ones the federal government offers for some low-risk borrowers, said Elizabeth Akers, a fellow at the Brookings Institution’s Center on Children and Families. Refinancing a home in the private loan market and the way the federal government underwrites loans are not analogous, Akers said.
Further, unlike mortgages, there is an income-based repayment plan option for student loans. The Education Department’s Revised Pay as You Earn plan, or REPAYE, allows all borrowers to take advantage of the repayment plan regardless of their income or when they borrowed. REPAYE caps borrowers’ monthly bills at 10 percent of their income for 20 years. After 20 years, the remaining debt is forgiven.
Under this program, the calculation for your monthly payment is based on your discretionary income. If your income is very low, you may not have to pay anything until your paycheck increases. REPAYE is the government’s most generous student loan repayment plan, and this type of loan modification doesn’t apply to mortgages — at least without ruining your credit rating.
The Pinocchio Test
Unlike Sanders claims, most homes are not refinanced at a rate of 2 or 3 percent. And although student loan rates may reach 10 percent in some circumstances, there are much lower interest rates that are almost equal to the average 30-year mortgage rate. This is a classic example of cherry-picking two numbers to make the point you want.
Yet even with the cherry-picked numbers, the comparison doesn’t work. Sanders says “it makes no sense that students and their parents pay higher interest rates for college than they pay for car loans or housing mortgages.” Perhaps “it makes no sense” because the two loans are so different. You pay a lower interest rate on paying for your home partly because you have a property at stake, unlike with a student loan. There is now a generous repayment plan for student loans, where you may not even pay anything for a while if you’re not earning enough. You can’t do that with mortgages — at least without your house getting taken away.
Sanders combines cherry-picked numbers with an apples-to-oranges comparison that creates a misleading impression. This fruit salad of a claim earns Three Pinocchios.
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