Senate Democrats Reintroduce Student Loan Refinancing Bill

By Brittany Hackett, Communications Staff, and Jesse O’Connell, Policy and Federal Relations Staff 

Senate Democrats on Wednesday introduced the Bank on Students Emergency Loan Refinancing Act, an updated version of a college affordability bill of the same name authored by Sen. Elizabeth Warren (D-MA). 

Warren’s bill, initially introduced early last month, would allow students the opportunity to refinance their outstanding Direct, Federal Family Education Loan (FFEL), and/or private loans at the new market-based rates set for the 2013-14 award year by the Bipartisan Student Loan Certainty Act of 2013. The interest rate would be fixed for the life of the refinanced loan. To qualify for refinancing, a borrower would have to meet certain income or debt-to-income ratios determined at a later date by the Department of Education (ED).

The bill introduced Wednesday largely mirrors Warren’s original bill, with some key differences such as the removal of the origination fee, addition of student notification of their ability to refinance, and the treatment of consolidation loans.  

Reissuing Federal Loans 

Federal Direct Loans. The bill would give the Secretary of Education the authority to reissue a Federal Direct Subsidized Stafford Loan, Federal Direct Unsubsidized Stafford Loan, Federal Direct PLUS Loan, or Federal Direct Consolidation Loan for which the first disbursement was made, or application for consolidation was received, before July 1, 2013.

FFEL Program Loans. The Act provides the authority for the Secretary to reissue a loan that was made, insured, or guaranteed under the FFEL Program, or for which the application for consolidation was received, before July 1, 2010. The Secretary would pay the proceeds of the reissued loan to the FFEL lender and reissue the loan to the borrower as the equivalent loan under the Direct Loan Program (i.e., as a Federal Direct Stafford Loan, Federal Direct PLUS Loan, Federal Direct Unsubsidized Stafford Loan, or Federal Direct Consolidation Loan).

Interest Rates. The interest rates for the reissued loans would be set at a rate equal to the market-based rate for award year 2013-14 as determined by the Bipartisan Loan Certainty Act of 2013. The new fixed rates on the reissued loans would be as follows: 

  • If the original loan is a Federal Direct Stafford Loan, or a Federal Direct Unsubsidized Stafford Loan issued to an undergraduate student, the refinanced rate would be 3.86 percent. 
  • If the original loan is a Federal Direct Stafford Loan or a Federal Direct Unsubsidized Stafford Loan issued to a graduate or professional student, the refinanced rate would be 5.41 percent. 
  • If the original loan is a Federal Direct PLUS Loan, the refinanced rate would be 6.41 percent. 
  • If the original loan is a Federal Direct Consolidation Loan, the refinanced rate would be a weighted average, calculated based on the proportion of the remaining balances of the component loans prior to consolidation, of the following interest rates 
    • The lesser of 3.86 percent or the original interest rate of the component loan, if the component loan was a Federal Direct Stafford Loan, or a Federal Direct Unsubsidized Stafford Loan issued to an undergraduate student 
    • The lesser of 5.41 percent or the original interest rate of the component loan, if the component loan was a Federal Direct Stafford Loan or a Federal Direct Unsubsidized Stafford Loan issued to a graduate or professional student
    • The lesser of 6.41 percent or the original interest rate of the component loan, if the component loan was a Federal Direct PLUS Loan
    • A weighted average calculated as described above, if the component loan was a Federal Direct Consolidation Loan
    • The original interest rate, if the component loan was any type of loan not already described

Repayment Period and Terms. The bill stipulates that reissuing the loan would not extend the duration of the repayment period and the terms of the original loan would remain in effect. Borrowers would continue to have the ability to switch repayment plans at any time. There would not be an origination fee for the reissued loan, which is a change from the original iteration of the legislation.

Qualified Borrowers. The bill would direct ED to establish the income or debt-to-income ratios that borrowers must meet to qualify for refinancing.  The ratios must ensure access to borrowers with the greatest financial need. The Secretary would have 180 days from the passage of the Act to design the loan refinance program, including the eligibility requirements.

Notification of Borrowers. The bill directs ED in partnership with the Consumer Financial Protection Bureau (CFPB) to engage in an awareness campaign to alert borrowers that they are eligible for refinancing. The campaign has to include the following activities:

  • Developing consumer information about the availability of refinancing
  • Requiring servicers to provide this information to borrowers in a manner deemed appropriate by ED and CFPB

Reissuing Private Loans 

The Bank on Students Emergency Loan Refinancing Act would also give students with outstanding private loans the opportunity to refinance them as federal student loans. Private loans eligible for this process need to have been disbursed prior to July 1, 2013, and be for the borrower’s own postsecondary educational expenses for an eligible program at an institution participating in the federal loan program at the time the private loan was issued. Private loan borrowers need to have been current on payments for the six months prior to applying for refinancing, not be in default on the loan or other student loan, and must meet the income or debt-to-income eligibility requirements established by ED. When determining the eligibility criteria the Secretary is additionally required to consider inequities between Federal Direct Refinanced Private Loans and other federal student loans and to preclude windfall profits to private educational lenders. Borrowers would also be required to undergo loan counseling before their private loan could be refinanced. 

The existing private loan would be paid off and the borrower would receive in its place a Federal Direct Refinanced Private Loan, carrying generally the same terms, conditions, and benefits as a Federal Direct Unsubsidized Stafford Loan at the following fixed interest rates:

  • If the student was an undergraduate student when the private loan that is being refinanced was issued, the refinanced rate would be 3.86 percent;
  • If the student was a graduate or professional student when the private loan that is being refinanced was issued, the refinanced rate would be 5.41 percent;
  • If the student is refinancing a private loan originally issued for both undergraduate and graduate or professional study, the refinanced rate would be 6.41 percent.

Federal Direct Refinanced Private Loans would not count towards a borrower’s annual or aggregate limits, and additionally would not be eligible for the various forms of service-related repayment benefits otherwise offered by federal loan programs, including public service loan forgiveness.

The bill also creates a reporting requirement for private educational lenders, to allow for an assessment of the private education loan market. Lenders will be required to report:

  • The total amount of private education loan debt held by the lender;
  • The total number of private education loan borrowers the lender serves;
  • The average interest rate on the outstanding debt held by the lender;
  • The proportion of borrowers in default on a loan held by the lender;
  • The proportion of the outstanding volume held by the lender that is in default;
  • The proportion of borrowers who are 30, 60 and 90 days delinquent;
  • The proportion of the outstanding volume that is 30, 60, and 90 days delinquent.

Since the introduction of the earlier version of the Bank on Students Emergency Loan Refinancing Act, Senator Warren has received 35 co-sponsors in the Senate, and Reps. George Miller (D-CA) and John Tierney (D-MA) have introduced a companion bill in the House.

The bill pays for the refinancing program by including the passage of a fair-share tax on high-income earners (the so-called “Buffett Rule”) which seeks to ensure that households making over $1 million dollars a year do not pay less in taxes than a middle class family. It achieves this by limiting access to tax loopholes and certain tax rates. The additional revenues raised by the Buffett Rule would cover the cost of the loan refinancing program, and the refinancing program will terminate at the point that the Buffett Rule no longer covers those costs, or two years after enactment, whichever comes first.

CBO Releases Score on Warren Bill

Also on Wednesday, the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) released its score of the original Warren bill, reporting that the legislation would increase deficits over the 2015-19 period by about $19 billion but reduce deficits over the 2015-24 period by about $22 billion. In addition, enacting the bill would increase direct spending by an estimated $51 billion over the 2015-24 period but also increase revenues by about $72 billion over the same period.

The report estimated the cost of refinancing student loans, taking into consideration provisions in the bill regarding income limits and debt-to-income ratios, years left on repayment, interest rate, and income-based repayment plans. 

CBO estimates that about half of the outstanding loan volume for federal student loans and federal guarantees, or about $460 billion, and about half of the outstanding private student loan volume, or around $60 billion, would be refinanced under the bill. 

According to the report, the federal government would receive less interest income over the life of the new loans following refinancing with lower interest rates, making the loans and loan guarantees more costly for the government. CBO estimates that the Warren bill would increase direct spending for currently outstanding federal loans by about $55.6 billion in 2015 because of the loss of interest income. 

Refinancing private student loans would reduce direct spending by $5 billion over the 2015-24 period, but there would be additional costs to administer these loans, which CBO estimates would increase direct spending by $0.2 billion over the same period.

The report also examines the likely amount of revenue expected to be raised by the Buffett Rule. JCT estimates that enacting this Buffett Rule would, in total, increase revenues by $31.7 billion over the 2015-19 period and $72.5 billion over the 2015-2024 period.

 

Publication Date: 6/6/2014


Jessica W | 6/11/2014 3:33:43 PM

If only.

Theodore M | 6/6/2014 8:48:52 AM

I don't understand why the limits on FFELP borrowers. It seems like the feds would want to buy those loans to save the payments they make to the lender.

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