A previous version of this article also neglected to mention that Sen. Warren's bill would require the government to consider students' income or debt-to-income ratio in determining eligibility for refinancing. The CBO expects that "such guidelines would make only about 5 percent of the outstanding loan volume ineligible for refinancing."
This version has been corrected.
Students with debt are, in a technical sense, America's deadbeats. A higher percentage of Americans with student debt are delinquent on their loans than people with credit card debt, an auto loan or a mortgage. Some will be in debt for their entire lives, since it is often legally impossible to escape student debt even through bankruptcy.
Sen. Elizabeth Warren (D-Mass.) has proposed a bill to address America's $1 trillion student debt problem. Democrats plan to bring it to a floor vote next week. The bill would allow students and families who borrowed money at higher interest rates in the past to refinance their loans at the lower rates available to students who borrow now. The bill could immediately and directly benefit millions of borrowers with student debt by reducing their monthly payments.
How it will work: A different kind of refinancing
What the bill proposes is not refinancing in the typical sense. Last year, Congress passed a law -- a remarkable occurrence in itself these days -- linking the rate on federal student loans to the rate on Treasury bonds. Previously, the rate for standard undergraduate loans had been fixed at 6.8 percent. The law reduced that figure, for this past year's students, to 3.86 percent. One of the provisions in Warren's bill would allow students who borrowed before last year's law at the higher rate to apply to receive the new lower rate.
Yet unlike a bank's offer to refinance a mortgage at a lower rate, the federal government will not profit on the transaction. By reducing interest rates for these borrowers, the federal government would lose $55.6 billion in the year the bill is enacted on a present-value basis -- or just "over the life of the loans" which I think is basically the same thing, the Congressional Budget Office predicted.
Another provision in Sen. Warren's bill would allow the federal government to assume loans provided by private companies such as Sallie Mae without any federal support, which account for around 10 percent of total student debt.
This kind of transfer is closer to a typical refinancing for a mortgage, in that it would not only help borrowers, but also generate about $5 billion in revenue for the government, per the CBO's estimate. The provision is seen as a win-win because the federal government can make student loans more cheaply and efficiently than the private sector. It can borrow money initially for lower rates than a private entity in order to take on the loans, and the government has more power to force delinquent borrowers to pay up.
Who will the bill help most?
Anne Johnson, the director of a program at the Center for American Progress addressing the problems of young people, called Warren's bill "logical."
"It's pretty heartbreaking what this debt is doing to people," Johnson said, noting that graduates of all ages and their parents now hold more than $1 trillion of outstanding student debt.
There are many graduates who are struggling to repay their loans, Brookings Institution's Matthew Chingos said, but he questioned whether Warren's refinancing bill was the best way of helping them. Since the bill requires private borrowers to apply for the federal government to assume their debt and to show that they are in good standing, Chingos worries that the bill will exclude some of those borrowers who need the help the most.
Chingos has also argued against the bill because it makes the same offer to all eligible borrowers, no matter how much they owe. Someone who has graduated from a for-profit vocational school with a comparatively small debt might be in a much worse position than a newly minted dermatologist with hundreds of thousands of dollars in debt. Yet the bill has the potential to offer the largest total monetary benefit to people with larger debts.
The bill does require the Department of Education to set limits on who is eligible to refinance based on borrowers' levels of debt and income, Chingos noted, but he argued that the wording of that provision is too vague to effectively focus the program on those who are likely to have difficulty repaying their debts.
Chingos offered other solutions, like making the income-based repayment programs more efficient and easier to understand. (These are programs that allow graduates to make smaller payments if they aren't earning enough.) He also suggested that the government offer more Pell grants.
"When you're talking about giving people a reduction in the interest rate on their loans, CBO said that would cost $55 billion. That's a lot of Pell grants," he said.
Sandy Baum, an economist at the Urban Institute, also said that while the bill wouldn't do any harm, it also wouldn't really help those most in need. "The problem is that there are lots of people in this economy who are struggling," she said. "People sort of think students are poor, but the reality is, that’s not really true. Some of them are, but mostly, people who went to college are more privileged than not."
That said, this Congress has not been especially forthcoming with assistance for people who are hungry or out of work. By contrast, there is at least a slight possibility that Warren's bill might pass, argued Johnson of the Center for American Progress. She noted that Congress has passed legislation to reduce student debt both last summer and in 2012 and that the issue has broad support from voters across the political spectrum.
That might be the strongest argument for the bill. The main portion of the legislation -- reducing interest rates for borrowers with old federal student loans -- might merely be the equivalent of the government writing a small monthly check to millions of households until the loans are paid off. Still, even that would stimulate the economy, and it looks like one of the few politically feasible ways of doing so at the moment.