Why People Are Calling This Student Loan Bill a 'Wolf in Sheep's Clothing'

October 9th 2015

Aron Macarow

A new student debt bill co-introduced by Republican Senators Kelly Ayotte (New Hampshire) and Shelley Moore Capito (West Virginia) in the Senate last week intends to make it easier for borrowers to refinance their federal student loans in the private marketplace.

According to Think Progress, however, the private market has the most to gain from the proposed legislation. 

The Student Loan Relief Act of 2015 (S. 2009), would allow loan borrowers to refinance federal student debt the same way they can a mortgage or a car loan. The bill's authors argue it would enable students to benefit from lower private interest rates.

"[Our bill] will level the playing field for borrowers, boost the economy and help qualified individuals repay their loans," said Capito of her legislation.

In addition to opening up the federal loan program to private refinancing, the bill would create a tool to allow employers to help qualified employees repay student debt with pre-tax dollars.

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So this bill will make it easier to refinance student loans?

Yes, it probably will make it easier to privately refinance federal loans. But it still won't allow students to keep the special benefits tied to federal borrowing, which doesn't make it a good deal for students. (Young Invincibles policy director Jennifer Wang has called the proposed act "a wolf in sheep's clothing.") It also doesn't answer our deepening student loan crisis.

Stripping consumer protections from refinanced federal loans isn't the only negative effect it will have either. The bill would also privatize profits from loans that are still guaranteed by the federal government, generating profits for the private loan industry while passing the risk on to taxpayers.

The Congressional Budget Office, a non-partisan organization, projects that the federal government will make $47.2 billion in profit from student loans over the next 10 years. This is big business, and the private loan industry would get a much bigger piece of the pie if this legislation is enacted.

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Let's talk about refinancing

Currently, private student loans—like those obtained directly from banks, state agencies or educational institutions—can be refinanced in the private marketplace just like any other borrowed money. This translates a private loan into a new private loan, hopefully to the borrower's benefit with a lower interest rate. These non-federal loans do not have any of the special protections in place that federal student loans provide. But since they weren't federal loans to begin with, nothing is lost by translating them into new private loans.

The bill targets federal loans, which have limited refinancing options. At present, federal loans cannot be refinanced into lower interest rate federal loans. They can, however, sometimes be refinanced as private loans—but to the loss of the borrower protections that make the loan attractive in the first place.

The benefits of federal loans to a student borrower are myriad, including the ability to temporarily postpone or reduce payments, tie monthly payment amounts to your annual income, tax deductible interest, and the ability to have your loans forgiven altogether if you work in certain public service sectors. Refinance your federal loan with a private lender and you will likely lose all of these benefits.

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