When interest rates go down, many people with outstanding loans — house, car, home-equity — look at refinancing. Unless your debt is a student loan, in which case federal law places you in a different category from other borrowers and sticks you with the original loan rate.
Today, the Senate is expected to take up Massachusetts Democrat Elizabeth Warren’s proposal to fix that. Her bill is a fine and fair idea, but it would impose a minimum tax on the wealthiest Americans — an approach that has stirred opposition and makes it a long shot to pass. Which is too bad, because the bill could help Americans saddled with student loan debt and boost the economy.
In a related effort, President Obama announced this week an expansion of the Pay As You Earn (PAYE) option that will let nearly 5 million more people with student loans limit their monthly payments to 10 percent of their income. That option already is available to debtors who borrowed money after 2012, when PAYE began; the expansion would extend it to those who got their loans before that.
Both measures are positive, justified steps to ease the fiscal pinch from student loans. Over three decades of stagnant family incomes, average tuition at a four-year public university has tripled.
Some 40 million people hold student loans that total more than $1.1 trillion — a debt level larger than that of credit-card holders. The Institute for College Access and Success estimates that 7 of 10 college seniors in 2012 had student loan debt, owing, on average, $29,400.
For years, the federal government tied the interest rate to Treasury bills. In 2006, it fixed the rate for need-based Stafford loans at 6.8 percent, then gradually lowered the subsidized rate to 3.4 percent. Rates for graduate students were higher.
Last year, Congress recast the formula, setting rates for the 2013-14 academic year at 3.86 percent for undergraduates and 5.41 percent to 6.41 percent for graduate-student loans. The Warren bill would let those with higher rates on older loans refinance at the current rates.
And it would allow those with private loans, as long as they are up to date on their payments, to refinance through the government program. The Congressional Budget Office predicts that $460 billion in debt would get refinanced, at a cost of $61 billion in expenses and lost revenue from lower interest payments.
To offset that expense, Senator Warren wants to raise taxes on people who earn more than $1 million a year. Whatever the merits of such a plan, it is likely to be a deal-killer in the Senate, where Republicans would be sure to filibuster it. In the House, Republicans hold a majority and are committed to opposing new taxes.
So the bill won’t graduate. Ms. Warren should work with her colleagues to find another funding mechanism they can support, and enact this bit of relief.
— Los Angeles Times