Jun 19, 2014 | By Carolyn Burstein, NETWORK Communications Fellow
June 19 Update
On June 11, Senator Elizabeth Warren’s attempt to aid those carrying student loan debt unfortunately failed to get the required 60 votes to achieve cloture in the Senate. The bill, called the “Bank on Students’ Emergency Loan Refinancing Act,” did get the support of three Senate Republicans, two of whom had signed Norquist’s no-tax-increases pledge, but that number only gave the Democrats 56 votes, four short of the threshold. Senator Harry Reid (D-NV), Senate Majority Leader, voted against the motion for procedural reasons so he could call the bill up again, which means the bill really only lacked three votes.
Republicans said the bill did nothing to reduce borrowing or lower education costs, and they accused Democrats of playing politics by highlighting an issue that was bound to fail. In fact, Senator Lamar Alexander (R-TN), ranking member of the Senate Health, Education, Labor and Pensions Committee, called the bill a “partisan political stunt” that included a “class warfare tax.” He was particularly incensed that Warren’s bill had skipped the committee process.
Despite the setback, Warren later said at a press conference that she plans to reintroduce the bill after she has gained more bipartisan support. If that fails again, Senator Tom Harkin (D-IA) held out hope to student loan borrowers through his committee’s reauthorization of the Higher Education Act, the main law that lays out student loan policy. However, the rewriting process for that bill, which expires this year, is just beginning and it may take a very long time before it is signed into law.
Senator Warren would have paid for the student loan refinancing bill with the so-called “Buffet Rule,” whereby a minimum 30% income tax payment would be levied on people earning between $1 and $2 million each year. Although Senator Warren initially said that she was open to alternative plans to replace the $66 billion lost to the Treasury by her rate reduction, no one across the aisle had any to offer. The “Buffet Rule” started out as the principle that the tax code should be reformed in a way that ensures that millionaires don’t pay lower taxes than middle-income people. A “Citizens for Tax Justice” (CTJ) report explains that because investment income, which primarily goes to the wealthiest Americans, is subject to lower rates under the personal income tax and is not subject to Social Security taxes, such taxes do foster inequity among people.
The vote on June 11 followed two days where President Obama highlighted the issue first to graduates in Massachusetts and then from the White House when he announced executive action to let borrowers before 2007 (about 5 million people) cap their monthly payments at 10% of their income. Unfortunately, none of this helped the Warren bill, which could have assisted an estimated 25 million people refinance their debt at less than a 4% interest rate.
As noted in my previous blog (below), student loan debt exceeds $1 trillion and has emerged as a major drag on the economy, affecting the young as well as the old and especially people of color. Until the Warren bill or the reauthorization of the Higher Education Act pass, there are few options available to worried borrowers. Some financial institutions have responded in a variety of ways, but there are numerous hurdles preventing them from assisting these borrowers. These hurdles range from the risks associated with attracting troubled borrower to the way student loans are packaged into securities and sold to investors. The terms of the latter often preclude any modifications of the loans that underpin the securities.
May 9, 2014
With extremely low interest rates available to those with decent credit ratings, homeowners, businesses, even state and local governments, have been rushing to refinance their debts. One group not among them is made up of students obtaining money for their education, even though student loan debt is the fastest growing category of debt – far exceeding auto loans, mortgages and even credit card debt. Why? As the Center for American Progress (CAP) put it in a November 2013 article, “one of the toughest things about student loans is [their] inflexibility.”
Student loans can be consolidated, but not refinanced legally today. Interest rates hit a high of 8.25% in the late 1990s and student loans were given at those rates. Today, those same loans are available to college students at a rate of 3.86% interest, thanks to legislation passed last summer (Bipartisan Student Loan Certainty Act), yet students who borrowed in the 1990s until June 2013 are still paying at interest rates charged at the time of their loans.
In that same November 2013 article, CAP said, “Providing student-loan borrowers the opportunity to refinance their debt is a way to solve a significant portion of the growing student-debt problem. Refinancing could significantly reduce monthly payments, increase repayment rates, and stimulate the economy by freeing up a portion of each student-loan borrower’s income that could be spent in other sectors of the economy or saved for larger purchases.”
The ripple effect in the economy would be extremely positive as those with less to pay in student loans could purchase homes, furniture, appliances and autos (the list could go on), which would then stimulate these industries, driving job growth, economic stability and all the other effects that come with economic stimulus.
The beauty of Senator Elizabeth Warren’s (D-MA) new bill, introduced on May 6, is that it is coming to the aid of nearly 40 million Americans saddled with $1.2 trillion in student debt. Her bill, called the Bank on Students Emergency Loan Refinancing Act, would allow borrowers with outstanding student loan debt to refinance at the lower interest rates (3.86%) currently offered to new borrowers. The most recent data from the end of 2012 found that borrowers had an average of $29,400 in student debt by the time they completed their courses.
By allowing student debtors to refinance at the current interest rate of 3.86%, Senator Warren’s proposal would reduce the amount of profit the higher rates are producing for the federal government. Warren pointed to a recent GAO report that estimates that the government will make $66 billion off of federal student loans dispersed between 2007 and 2012 as an indicator that there is room for refinancing. In her statement on the Senate floor, Senator Warren said that the current debts owed in student loans are unsustainable, destabilizing individual families and a measurable drag on our economy. She maintained that from 2004 to 2012 the average student loan balance increased by 70%.
Because of the economic repercussions of student loans as well as the fact that the “Higher Education Act of 1965” has to be reauthorized in 2014, five bills have been introduced by members of Congress during this past year to address the student debt problem, including that of Senator Warren, which appears to be the most viable.
Senator Warren’s bill has more than 20 co-sponsors in the Senate and Reps. George Miller (D-CA) and John Tierney (D-MA) have filed a companion bill in the House. At the present time, Warren proposes to replace the profit lost to the Treasury by raising the tax rate of people making more than $1 million annually. However, she later told the Wall Street Journal that she would be flexible about how the refinancing would be funded.
We at NETWORK heartily endorse Senator Warren’s bill for several reasons. Most importantly, by reducing debt, refinancing will allow borrowers to build their assets, especially through home ownership, thus helping to reduce the inequality that bedevils this country.
Home sales are also drivers of economic growth, as Moody Analytics explains, in that each newly created household (i.e. new home purchased) leads to approximately $145,000 of economic activity. It is indeed stimulating that a large segment of the population could recover from the financial doldrums of the past few years and actually prosper economically. We at NETWORK believe that all people should be financially secure and that financial stability is the best way to ensure that all families can provide independently for their needs.
According to Generation Progress (a relatively new non-profit organization based at CAP which advocates for progressive political and social policy on behalf of young people), the cost of college has increased 1,120% over the past 30 years, drastically outpacing inflation, even though some form of higher education has become increasingly necessary for employment. Part of the increase in tuition is due to a disinvestment in higher education by strapped state governments. As college costs rise, so does the average amount of money that students, who are not wealthy, are forced to borrow. Today, student loan debt is second in size only to mortgage debt, but student loan borrowers are more severely delinquent (1 in 10) than any other debtors.
Who are these student-loan borrowers? They come especially from low and middle-income families, are often people of color, and are all ages: young, older and old.
Education debt has a greater impact on low-income families than other American families. According to Pew Research on Social Trends, borrowers in the lowest fifth of households faced student-loan debt that averaged 24% of their household income, compared to all households where student debt equaled just 6%. Because of rising college costs, a family in the lowest quintile (average income around $18,000 per year) would have to pay more than 70% of the family income to cover college costs, even after accounting for grant aid. This is a significant reason why so few low-income students apply to college, and this situation contributes to the shrinking economic diversity at colleges and universities.
Borrowers from middle-income families have been taking on increasing amounts of student debt, since the incomes for these families have fallen about 19% since 2007 while college tuition has skyrocketed. We know the middle class is shrinking and student debt is keeping borrowers from reaching it. As a matter of fact, this debt will cripple the core of the nation unless lawmakers reduce this burden, which acts as a tax on future wages and postpones the ability of young people to settle down, buy a home or start a family.
Let’s consider borrowers of color. They:
Student loan debt has a significant impact on senior borrowers, too. Seniors have often co-signed loans with their children or grandchildren to help them afford the cost of rising tuition. By 2011 90% of borrowers had a co-signer, up from 55% in 2005. Or they, themselves have gone back to school to become more competitive in their fields. Senior citizens still owe millions of dollars in education debt; the number of education loan borrowers over the age of 60 has tripled since 2005, according to Generation Progress. Defaulting on debt affects seniors more than any other age group because they are often living on fixed incomes due to retirement and often their social security checks are garnished for debt collectors who harass them for debts that may be decades old.
As if the facts stated above are not enough to stir your compassion, there are some additional facts to consider. According to the May 5, 2014 issue of U.S. News and World Report, the data surrounding how many people struggle with student debt is only measured through defaults and does not even include data on graduate loans or other types of loans (e.g., federal Perkins loans) of which there are thousands. The default rate includes only borrowers who skip payments for nine months, but does not include those who miss payments for three months and are reported to a credit bureau. A damaged credit report due to delinquency will make it harder for these borrowers to buy a home or car or even get a job. If we include all student-loan borrowers who have had major problems with their loans, for one reason or another, we are talking about several million people who have restricted purchasing power as consumers and struggle to support themselves and/or their families. Is it any wonder that our economy is sluggish or that inequality is a growing issue?
Another serious concern is that students taking out college loans for the next school year will face interest rates of about 4.66%, almost a percentage point higher than last year. That is because the rates for student loans are set by the rates of the most recent 10-year Treasury bond auction. And since the Federal Reserve is continuing to cut its 'quantitative easing' purchases each month, interest rates on Treasury bonds will cause student-loan interest rates to continue to rise, thus increasing the debt burden of all who take out loans.
As we have seen, student loan debt is a serious drag on the economy and adds to the number of Americans who are prevented from full participation in the economic life of our nation. Allowing for the refinancing of student loans is a pragmatic policy that would not only provide relief for millions of borrowers, but also would generate economic growth and add stability to family life.
NETWORK does not believe, as many cynics do, that the Warren bill is just a part of the political messaging rampant in this mid-term election year and is intended merely to bolster the argument of economic inequality. We believe it is critical for Congress to move quickly to support Senator Warren's bill and its counterpart in the House while interest rates are still near historic lows. We also believe it will be a step in eradicating a form of economic injustice.