Why Oppose Student Loan Reform?
A look at the other side
Alex Garcia | 10/28/14 7:41pm
Millions of Americans’ hopes that their student loan debt would be granted lower interest rates were indefinitely delayed. In June, the Senate rejected the “Bank on Students Emergency Loan Refinancing Act” (Student Loan Refinancing Act) by a 56-38 vote, falling just short of the 60 votes needed to advance in the legislative process.
Among the disappointed were the bill’s primary sponsor, Senator Elizabeth Warren (D-Mass.), and millions of current college students. But there’s a reason the bill didn’t pass, a reason worth examining as college students ourselves, many of whom have already accumulated thousands in student loans.
The bill would have allowed 25 million Americans to refinance their federal and private loans to 3.86 percent. In response, Sen. Warren accused the bill’s opponents of “[siding] with the billionaires.” But was that vote really a Democrat-versus-Republican, poor-versus-rich, good-versus-bad issue? Sure, most of us would agree that rising student loan debt is a worthy issue on our nation’s political agenda, but Senator Warren’s bill may not quite be the most appropriate solution.
The major flaws in Sen. Warren’s bill involve the bill’s proposal for how the loans’ reduced interest rates would be paid for. Under the Student Loan Refinancing Act, the ever-popular Buffet Rule would be enacted to replace the lost revenue, meaning that the federal government would impose an increased minimum tax rate on Americans whose annual income exceeds $1 million. The federal government already subsidizes a portion of student loans, but this bill suggests that our country should subsidize all student loans using the profits made by yesteryear’s students. These loans are more likely than most to become delinquent, costing the lender over time.
Do we really want to force our most successful citizens to feed into another welfare-style initiative, similar to the Earned Income Tax Credit? Furthermore, should we be teaching our students, mostly young people, that they don’t have to be fully responsible for their own loans? Lowering interest rates on student loans sends students the message that taking out loans is easy and virtually risk-free when we should be discouraging financially unstable persons from borrowing in the first place.
Moreover, Sen. Warren’s bill would have virtually expropriated private lending companies by allowing borrowers to refinance private loans. Slashing interest rates on federal loans that the government itself funds by letting its borrowers refinance is one thing, but expanding this refinancing liberty to private companies such as Sallie Mae is quite another. By forcing the Department of Education to allow borrowers to refinance at a lower rate, it would basically decrease the value of these private companies that turn a profit from interest rates and fees on delinquent loans.
Companies like Sallie Mae are publicly traded and would undergo unprecedented regulation that would thwart their ability to answer to shareholders. Not exactly a fair penalty for lenders who have expected to be repaid at a certain rate, and definitely not good for federal revenue collection.
Undeniably, high student loan debt is still a problem for students and a more proactive measure we might take would be to prevent students from accumulating so much debt. There are programs that help borrowers avoid defaulting, just not well-advertised by the federal government. Payment plans for federal student loans include the Extended Repayment, Income-Based Repayment, and Pay As You Earn Repayment Plans, among others. There are also deferment plans for those who face economic hardship and unemployment; even loan forgiveness is offered in certain situations.
Perhaps if the federal government invested more resources in the financial literacy of loan borrowers, students might learn to deal with their loans more responsibly while completing school and immediately following graduation, and default might be more often avoided. Sen. Warren may have the best interests of students in mind, but her bill evidently proposes solutions far too controversial and one-sided for today’s political and fiscal climate.