Next up on the Democrats’ cynical election-year agenda is student loans. Never mind that Congress addressed this issue just last year with bipartisan support. Now Democrats are rallying behind S.2432, the Bank on Students Emergency Loan Refinancing Act. This legislation would allow borrowers to refinance any type of student loan (private or federal) to market rates set in 2013.
In coordination with the Democrats’ bill in the Senate, yesterday President Obama signed a memorandum to change regulations to the “Pay As You Earn” program to allow an additional five million borrowers with federal student loans to cap their monthly payments at 10 percent of their income. Any remaining debt will be forgiven after 10 years for government workers and those in certain nonprofit jobs, and after 20 years for others. The expanded program is expected to be available to borrowers by December 2015.
Washington already holds more than $1 trillion in student loan debt
Recent Bipartisan Reform
Last year Congress enacted the Bipartisan Student Loan Certainty Act of 2013, which passed the Senate on a bipartisan vote of 81 to 18. The legislation tied federal student loans to a market-based interest rate. It provided certainty for students and parents by setting the rate borrowers pay at the time they take out their loan for the life of that loan.
A market-based annual rate allows students to benefit from low rates and also protects taxpayers. The caps established in the legislation were high enough that taxpayers will not unnecessarily subsidize lower rates in the future.
Specifically, the bill required that, for each academic year, all newly issued student loans be set to the U.S. Treasury 10-year borrowing rate plus an add-on to offset costs associated with defaults, collections, deferments, forgiveness, and delinquency. The details varied by the type of loan:
- Undergraduate loans: 10-year Treasury note plus 2.05 percent. The resulting interest rates for loans taken out after July 1, 2013, would be 3.86 percent for subsidized and unsubsidized loans for undergraduate students. The interest rate resets to 4.66 percent for loans taken out after July 1, 2014.
- Graduate loans: 10-year Treasury note plus 3.6 percent. The resulting interest rates for loans taken out after July 1, 2013, would be 5.41 percent on unsubsidized loans for graduate students. The interest rate resets to 6.21 percent for loans taken out after July 1, 2014.
- PLUS loans (for graduate students and parents of undergraduate students): 10-year Treasury plus 4.6 percent. The resulting interest rates for loans taken out after July 1, 2013, would be 6.41 percent on PLUS loans for parents and graduate students. The interest rate resets to 7.21 percent for loans taken out after July 1, 2014.
The law also protected borrowers against unforeseen circumstances by imposing a cap of 8.25 percent for undergraduate students, 9.5 percent for graduate students, and 10.5 percent for PLUS borrowers. Unsatisfied with this reform of new loans, and needing a political issue for the November elections, Democrats now propose to allow people who borrowed in the past to refinance using taxpayer subsidies.
Existing Repayment Options
There are already a variety of options subsidized by taxpayers to help students repay their federal student loans, including programs that forgive loan balances. These plans to help students repay their debt have been very popular. So much so, the Administration is trying to rein in these programs “amid rising concerns over the plans’ costs and the possibility they could encourage colleges to push tuition even higher.” Enrollment in income-based repayment plans has increased by 40 percent in six months, now covering approximately 1.3 million Americans who owe $72 billion.
Amid concerns of rising costs, the president’s fiscal year 2015 budget proposed a cap on debt eligible for forgiveness at $57,500 per student. Projected enrollment for IBR and PAYE has expanded massively in the budget. Last year, the administration estimated approximately $17 billion in loans issued in 2013 would be repaid through IBR. Now, the administration estimates that enrollment for loans taken out that year will be $27 billion. While the dollar amounts are rising, the estimated number of loans repaid has been revised lower from last year’s estimate.
Democrats’ Bill Misses the Mark
The Democrats’ bill would permit student loans made prior to July 2013 to be refinanced into the government’s Direct Loan program at a rate determined based on the market in 2013. Nearly all federal loans would be eligible to be refinanced, including existing federal student loans and student loans financed by private lenders.
“If we wanted to be quote, political, about this, we would have paid for it with the ‘Buffett Rule.’” – Senator Schumer, April 26, 2012
The bill does nothing about quality of education, and nothing to increase access to higher education. Democrats pay for this election year ploy with a $72.5 billion tax increase in the form of the “Buffett Rule” tax. Originally proposed in 2011, this tax hike has failed twice in the Senate. Other attempts to impose a “millionaire surtax” have been voted down in the Senate an additional six times. By proposing an offset sure to fail, Democrats have made clear they are not serious about enacting their bill into law – this is merely an election year stunt.