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Archive for Thursday, July 24, 2003

Legislation would allow student loan refinancing

July 24, 2003

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— You can refinance your house. You can refinance your credit card bills. Student loans? No way.

That could change if some members of Congress have their way. Several congressmen from both parties, including Rep. Dennis Moore of Kansas, have announced legislation that would remove the ban on student loan refinancing to help ease what for many recent college graduates is their biggest financial burden.

Dubbed the Student Loan Fairness Act, the bill would let anyone with current or future student loans take advantage of low interest rates, and shop for the best possible rates. Borrowers would be able to refinance at variable rates tied to U.S. Treasury bills and capped at 6.8 percent. At current interest rates, borrowers could get a rate of about 3.5 percent, said Rep. David Wu, the Oregon Democrat who wrote the legislation.

Current law allows borrowers to consolidate loans at a lower interest rate. But they can only do it once, and must do it with one of their original lenders.

This year, 1.7 million college students will graduate with an average student loan debt of about $16,000. Graduates from top law, medical and business school often begin their careers with more than $100,000 in such debt.

"Education is the best investment we can make in our future," Moore said. "Like home ownership, it is an investment we should encourage."

Rep. Rush Holt, a New Jersey Democrat, noted that the home refinancing boom of recent months had been important in keeping the struggling U.S. economy afloat.

"People who refinance their homes use that money in the economy," Holt said. "Refinancing (student loans) will make more money available. It'll help their lives and help the economy."

But experts say that's not so simple. For one thing, the government subsidizes all student loans, so the bill would cost the federal treasury money. Additionally, the federal government itself has about $93 billion in direct student loans outstanding, said John Dean, a Washington lawyer who specializes in education policy. Lower rates mean less income for the government.

"You have this exploding budget deficit, and it's a real question whether Congress can afford to create another expense," said Fritz Elmendorf, spokesman for the Consumer Bankers Assn.

One student loan industry expert said the bill could have a chilling effect on new loans, because private lenders pay for new loans by reselling outstanding loans, and the value of old loans is based on the fact that they can't be refinanced and generally aren't paid off early. Those selling points wouldn't exist under the new law, making it harder to sell the old loans to finance new loans, the expert said.

Some experts say a better solution for providing access to education is increasing the limit on student loans. The borrowing limits have not kept pace with spiraling college costs.

The cost of the proposed bill has not been determined, said Brian Branton, a Wu spokesman. But it would be cheaper than a competing Democratic bill that would lock in low rates for refinancing rather than using a capped variable rate.

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