Student Debt Refinancing Student Loans 101 Everything you need to know about how Congress could help millions of American borrowers, boost the economy, and tackle our student debt crisis. Sarah Audelo and Gurwin Ahuja May 2014 What Is Refinancing? Refinancing allows a borrower to replace his or her existing debt with a new loan that has a lower interest rate and better terms. This results in lower monthly payments and more money in the pockets of borrowers. In 2013, the Center for American found that student loan borrowers could achieve significant savings if federal student loans with interest rates above 5 percent were eligible to be refinanced. Specifically, those individual borrowers in 2013 would have saved $14 billion, and these savings would have generated $21 billion in economic activity in the first year alone. 1 Individuals and entities including homeowners, corporations, and state and local governments can refinance their loans. Refinancing generates economic growth, as borrowers are able to put more money toward other purchases. For example, according to Freddie Mac, mortgage borrowers who refinanced in 2013 will save on net approximately $21 billion in interest over the first 12 months of their new loan. 2 These savings can have positive ripple effects throughout the economy. 3 While refinancing can save borrowers significant amounts of money, student loan borrowers are the only group of borrowers who cannot refinance their loans. 4 WHY IS REFINANCING STUDENT LOANS IMPORTANT? Over the past 30 years, the cost of college has increased by 1,120 percent 5, drastically outpacing inflation. This is problematic because some form of higher education has become increasingly necessary for employment. 6 As college costs rise, so does the average amount students borrow. For borrowers in the class of 2012, the average amount of student loan debt upon graduation was $29,400. 7 Today, student loan debt is second in size only to 1 Generation Refinancing Student Loans 101
mortgage debt, 8 and total debt has ballooned to $1.2 trillion. 9 To make matters worse, student loan borrowers are more severely delinquent than holders of credit card, mortgage, and auto debt. 10 These high levels of student loan debt are impacting major economic decisions for young Americans. 11 The Federal Reserve Bank of New York found that borrowers with student loan debt are less likely to borrow to buy a home or a car than those without education debt. 12 Research conducted by One Wisconsin Institute found that student debt has directly contributed to $6.4 billion in reduced new vehicle sales annually. 13 In regards to the housing market, a delay in purchases of homes is significant because home sales are drivers of economic growth; Moody Analytics found that each new household formation leads to approximately $145,000 of economic activity. 14,15 If student loan borrowers had the ability to refinance, they could see significantly reduced monthly payments. In addition, lenders could see improved repayment rates, and the American public could see more economic activity as borrowers spend their savings in other sectors of the economy or save for larger purchases like a home or car. 16 WHO BENEFITS FROM REFINANCING? Allowing student loans to be refinanced is a common-sense policy that would primarily benefit middle- and low-income borrowers. As a share of income, student debt is highest among low- and middle-income Americans, according to Pew Research. 17 In fact, the share of burden on low- and middle-income Americans has been increasing. From 2007 to 2010, the one-fifth of households earning the least income saw student debt (as a percentage of their income) rise 9 percent; the middle one-fifth of households saw an increase of 5 percent. Further, from 2007 to 2010, the 40 percent of households earning the most saw significant declines in the mean amount of debt, while the bottom 40 percent saw significant increases in average debt. Allowing borrowers to refinance their student loans to a lower interest rate, coupled with affordable, income-based monthly loan payments, would benefit low- and middle-income borrowers who are disproportionately burdened by student loan debt. 2 Generation Refinancing Student Loans 101
REFINANCING STUDENT LOANS IS GAINING MOMENTUM Across the country, a broad coalition of groups including labor organizations, youth groups, and grassroots movements are advocating this solution, arguing that student loan borrowers should have the ability to refinance their loans. 18 In the Wisconsin state legislature, a bill titled the Higher Ed, Lower Debt Act has garnered significant public support 19 and gained endorsements from key newspapers 20,21 ; this has resulted in hearings in the Republicancontrolled State Assembly and Senate. 22 Federally, several members of Congress have also proposed refinancing legislation that would help student loan borrowers address their high levels of student debt. This session, there have been five major proposals from members of Congress: 1. Responsible Student Loan Act (S. 909/H.R. 1946) introduced by Sen. Jack Reed (D-RI), Sen. Dick Durbin (D-IL), and Rep. John Tierney (D-MA) This legislation, introduced in the Senate in May 2013 and the House in July 2013, would calculate the annual interest rate on federal Direct loans by adding the 91-day Treasury rate plus the cost of administering the loan. This bill would cap the annual interest rate for Direct Stafford loans at 6.8 percent and Direct Unsubsidized Stafford loans at 8.25 percent. If the annual interest rate determined by this act is lower than the fixed rate on a borrower s federal PLUS or Stafford loan, that borrower could refinance their loan to the new rate plus an administrative cost that cannot exceed 0.5 percent of the loan principal. 2. Federal Student Loan Refinancing Act (S. 1066/H.R. XXX), introduced by Sen. Kirsten Gillibrand (D-NY), Rep. Mark Pocan (D-WI), and Rep. Scott Peters (D-CA)* This act, introduced in the Senate in May 2013 and in the House in May 2014, would permit the consolidation of all federal loans whether held by a bank or the federal government into a new loan with an interest rate of 4 percent or less. 3. Student-loan refinancing proposal (H.R. 3047), introduced by Rep. Mark Pocan (D-WI) Under the Bipartisan Student Loan Certainty Act of 2013, which President Obama signed into law in June, student loan interest rates at 34 Center Generation for American Refinancing Factsheet Student TitleLoans 101
set annually based on the 10-year Treasury note. Under this proposal, students with Direct Loans at a higher rate than the one based on the 10-year Treasury note could refinance their loans to the lower rate. That new, refinanced rate is fixed throughout the life of the loan, unless the borrower decides to modify their loan again. 4. Refinancing Education Fund to Invest for the Future Act (S. 1266), introduced by Sen. Sherrod Brown (D-OH) This bill, introduced in June 2013, specifically addresses private student loans, which are made by banks and not the federal government. Under the proposal, the Treasury Department would establish credit facilities so that borrowers are able to refinance their private loans to a new interest rate, which would be determined based on their credit risk. The bill also says the credit facilities must operate at no cost to the government. In addition, the bill instructs the Treasury Department to conduct a national awareness campaign to private borrowers who might benefit from refinancing information about how to participate in the program. 5. Bank on Students Emergency Loan Refinancing Act (S. XXX/H.R. XXX), introduced by Sen. Elizabeth Warren (D-MA)**, Rep. John Tierney (D- MA), and Rep. George Miller (D-CA) This bill, introduced in May 2014, would allow borrowers with public and/or private student loans to refinance at the rate offered to new federal loan borrowers during the 2013-2014 school year. The program would be paid for by income generated from implementing the Buffett rule, which would apply a higher minimum tax to personal incomes over $1 million per year. Each of these proposals provides a way to meaningfully address the need to reduce monthly payments of millions for millions of borrowers with outstanding student loans. CONCLUSION Student loan debt is a serious drag on the economy. Allowing for the refinancing of student loans is a pragmatic policy that would provide relief for millions of student loan borrowers and generate economic growth. It is critical that Congress moves quickly to provide borrowers the ability to refinance while interest rates are still near historic lows. *House bill number unavailable at time of publishing **Senate bill number unavailable at time of publishing 5 4 Center Generation for American Refinancing Factsheet Student Title Loans 101
END NOTES 1 Anne Johnson, Tobin Van Ostern, It s Our Interest: The Need to Reduce Student Loan Interest Rates (Washington: Center for American 2013), available at http://www. americanprogress.org/wp-content/uploads/2013/02/ StudentLoanRefinancing-5.pdf 2 Freddie Mac, Borrowers Who Refinanced In 2013 Saving Over $21 Billion In Interest Payments Over the Coming Year (2013), available at http://www. freddiemac.com/finance/pdf/refireport2013q4.pdf 3 David A. Bergeron, Elizabeth Baylor, and Joe Valenti, Resetting the Trillion-Dollar Student- Loan Debt Problem (Washington: Center for American, 2013), available at http://www. americanprogress.org/issues/higher-education/ report/2013/11/21/79821/resetting-the-trilliondollar-student-loan-debt-problem/ 4 Dan Kadlec, Why Can t People with Student Loans Refinance at Better Rates? Time, February 20, 2013, available at http://business.time.com/2013/02/20/ why-cant-people-with-student-loans-refinance-atbetter-rates/ 5 Michelle Jamrisko, Ilan Kolet, Cost of College Degree in U.S. Soars 12 Fold: Chart of the Day, Bloomberg, August 15, 2012, available at http:// www.bloomberg.com/news/2012-08-15/cost-ofcollege-degree-in-u-s-soars-12-fold-chart-of-the-day. html 6 Catherine Rampell, It Takes a B.A. to Find a Job as a File Clerk, New York Times, February 19, 2013, available at http://www.nytimes.com/2013/02/20/ business/college-degree-required-by-increasingnumber-of-companies.html?pagewanted=all&_r=0 7 Matthew Reed, Debbie Cochrane, Student Debt and the Class of 2012 (Washington: The Institute of College Access & Success, 2013), available at http:// projectonstudentdebt.org/files/pub/classof2012.pdf 8 Federal Reserve of New York, Quarterly Report on Household Debt and Credit (2014), available at http://www.newyorkfed.org/ householdcredit/2013-q4/hhdc_2013q4.pdf 9 Cory Weinberg, Federal Student-Loan Debt Crosses $1 Trillion Threshold The Chronicle of Higher Education, July 17, 2013, available at http://chronicle. com/article/federal-student-loan-debt/140427/ 10 Federal Reserve of New York, Quarterly Report on Household Debt and Credit. 11 Elizabeth Sohns, $1.2 Trillion In Student Debt Is Stalling Millions of Americans Careers, Generation, March 6, 2014, available at http://genprogress.org/ideas/2014/03/06/25981/1-2-trillion-in-student-debt-is-stalling-millions-ofamericans-careers/ 12 Meta Brown, Sydnee Caldwell, Young Student Loan Borrowers Retreat from Housing and Auto Markets, Liberty Street Economics Blog, April 17, 2013, available at http://libertystreeteconomics. newyorkfed.org/2013/04/young-student-loanborrowers-retreat-from-housing-and-auto-markets. html#.u07zblewwso 13 One Wisconsin Now, Institute: New National Research Shows Trillion Dollar Student Loan Debt Crisis a Clear and Present Danger for Families and American Economy, Press release, June 20, 2013, available at http://www.onewisconsinnow.org/press/ institute-new-national-research-shows-trillion-dollarstudent-loan-debt-crisis-a-clear-and-present-d.html 14 Catherine Rampell, Movin Out, Economix: Explaining the Science of Everyday Life Blog, November 9, 2012, available at http://economix. blogs.nytimes.com/2012/11/09/movin-out/ 15 Bergeron, Baylor, Valenti, Resetting the Trillion- Dollar Student-Loan Debt Problem. 16 Ibid. 17 Richard Fry, A Record One-in-Five Households Now Owe Student Loan Debt (Washington: Pew Research, 2012), available at http://www. pewsocialtrends.org/2012/09/26/a-record-one-infive-households-now-owe-student-loan-debt/ 18 http://higherednotdebt.org/blog/student-loanrefinancing 19 Nyal Mueenuddin, Federal loan refinancing bill draws crowd to public hearing, Badger Herald, February 6, 2014, available at http://badgerherald. com/news/2014/02/06/federal-loan-refinancing-billdraws-crowd-public-hearing/#.u077sfewwsr 20 Journal Times Editorial Board, Journal Times editorial: Refinancing student loans should really be a no-brainer, Racine Journal Times, January 30, 2014, available at http://journaltimes.com/news/opinion/ editorial/journal-times-editorial-refinancing-student- loans-should-really-be-a/article_ac85448c-896b- 11e3-9792-001a4bcf887a.html 21 Editorial Board, Editorial: Allow refinancing of student loans, Green Bay Press Gazette, October 30, 2013, available at http://www.greenbaypressgazette. com/article/20131030/gpg0602/310300473/ Editorial-Allow-refinancing-student-loans 22 One Wisconsin Now Press Release, Momentum Builds for Higher Ed, Lower Debt Act as State Assembly Schedules Committee Hearing, February 6, 2014, available at http://www.onewisconsinnow.org/press/ momentum-builds-for-higher-ed-lower-debt-act-asstate-assembly-schedules-committee-hearing.html 6 5 Center Generation for American Refinancing Factsheet Student Title Loans 101