NASFAA Provides Summary Of Student Loan Refinancing Bill

By NASFAA Policy and Federal Relations Staff 

A group of Democratic senators introduced a bill that would allow certain qualified borrowers to refinance existing federal and private student loans at today’s interest rates. Introduced by Senator Elizabeth Warren (D-MA), the Bank on Students Emergency Loan Refinancing Act would give students the opportunity to refinance their outstanding 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. 

Reissuing Federal Loans

Federal Direct Loans. The bill would give the Secretary of Education the authority to reissue a Federal Direct 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. As a reminder, the Bipartisan Student Loan Certainty Act requires that beginning July 1, 2013 for each academic year all newly-issued federal student loans be set to the U.S. Treasury 10-year borrowing rate plus add-ons of 2.05% (undergraduate Direct Stafford Loans), 3.6% (graduate Direct Stafford Loans), or 4.6% (PLUS Loans). 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%.
  • 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%.
  • If the original loan is a Federal Direct PLUS Loan, the refinanced rate would be 6.41%.
  • If the original loan is a Federal Direct Consolidation Loan, the refinanced rate would be 6.41%.

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. The reissued loan would have an origination fee of not more than 0.5% of unpaid principal, accrued unpaid interest and late charges, of the original loan.

Qualified Borrowers. The bill would direct the Secretary 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.

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 6 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 the Secretary. Borrowers would also be required to undergo loan counseling before their private loan could be refinanced, and pay an origination fee equal to the fee charged for unsubsidized Direct Loans. 

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%
  • 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%
  • 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%

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.

“Exploding student loan debt is crushing young people and dragging down our economy,” said Warren in a press release announcing the bill. “Allowing students to refinance their loans would put money back in the pockets of people who invested in their education.” 

The bill was co-sponsored by Senators Barbara Boxer (D-CA), Patty Murray (D-WA), Dick Durbin (D-IL), Jack Reed (D-RI), Mary Landrieu (D-LA), Debbie Stabenow (D-MI), Sherrod Brown (D-OH), Sheldon Whitehouse (D-RI), Mark Udall (D-CO), Tom Udall (D-NM), Jeanne Shaheen (D-NH), Jeff Merkley (D-OR), Mark Begich (D-AK), Kirsten Gillibrand (D-NY), Al Franken (D-MN), Richard Blumenthal (D-CT), Brian Schatz (D-HI), Tammy Baldwin (D-WI), Chris Murphy (D-CT), Mazie Hirono (D-HI), Heidi Heitkamp (D-ND), Edward J. Markey (D-MS), Cory Booker (D-NJ).

Reps. George Miller (D-CA) and John Tierney (D-MA) introduced a companion bill in the House.

The overall cost of the Bank on Students Emergency Loan Refinancing Act is unclear at this point. The bill does contain deficit-neutral pay-for language by including the passage of a fair-share tax on high-income earners (the so-called “Buffet 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 Buffet Rule would cover the cost of the loan refinancing program, and the refinancing program will terminate at the point that the Buffet Rule no longer covers those costs, based on projections from the Congressional Budget Office.

The bill is not expected to become law in the immediate future. Even if the Senate can garner enough votes for passage, it is unlikely to be taken up in the House.
 

 

Publication Date: 5/7/2014


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