A Closer Look at S. 2432, “The Bank on Students Emergency Loan Refinancing Act”

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June 18, 2014 · by mlivolsi · Spark Notes
June 17, 2014
Prepared by:  Wes Huffman  (whuffman@wpllc.net) 
 
Senator Elizabeth Warren and several of her Democratic colleagues introduced legislation to allow existing student loan borrowers to refinance their student loans.  A nearly identical bill has also been introduced by Reps. George Miller (D-CA) and John Tierney, but it is not expected to move in the Republican controlled House. The legislation, dubbed the “Bank on Students Emergency Loan Refinancing Act” (S. 2432),  calls for the Department of Education to refinance existing Direct Loans, FFEL Loans, and private loans at last year’s interest rates for Stafford and PLUS Loans. Perkins Loans and HHS Loans would not be affected. The bill bypassed the Committee level and went straight to the full Senate.  There it failed to reach the requisite 60 votes to end debate and bring it to a vote on passage, but Democrats are expected to bring the bill up again in September.  It is not expected to pass Congress this year, but will likely remain a central issue in the 2014 campaign. 

S. 2432 is an updated version of the original legislation, but its structure remains the same—it creates a new federal loan program for the refinancing of existing federal and private student loans at the applicable rates of the 2013-2014 Academic Year. 

Federal student loans for 2014-2015 will be higher than the current academic year, but the legislation would rely on the rates of 2013-2014.  The rates for the refinanced loans are as follows:

If the original loan was a Federal Stafford Loan made to an undergraduate student:  3.41 percent

  • If the original loan was a Federal Stafford Loan for graduate students:  5.41 percent
  • If the original loan was a Federal PLUS Loan:  6.21 percent
  • If the original loan was a Federal Consolidation Loans:  The lesser of 6.21 percent or the weighted average of the underlying loans. 
  • If the original loan was a private student loan:  6.21 percent

The bill directs the Secretary to establish income and debt-to-income ratio thresholds for eligible borrowers. In the case of private loans, borrowers would have to be current on their accounts in be eligible. 

In the updated version (S.2432), the administrative and origination fees for these new refinance loans have been eliminated.  The interest rate on consolidation loans, originally pegged to the AY 2013-2014 PLUS Loan Rate, in the new bill is the lower of PLUS or the weighted average of the underlying loans. 

S. 2432 also includes new reporting requirements for private student lenders.  Within six months of enactment, the CFPB and Treasury Department would require private lenders to provide them with the following data:

    • Total amount of private education loan debt the lender holds.
    • Total amount of private education loan borrowers the lender serves.
    • Average interest rate on the outstanding private education loan debt held by the lender.
    • Proportion of private education loan borrowers who are in default on a loan held by the lender.
    • Proportion of outstanding private education loan volume held by the lender that is in default.
    • Proportions of outstanding private education loan borrowers who are 30, 60, and 90 days delinquent.
    • Proportions of outstanding private education loan volume that is 30, 60, and 90 days delinquent.

The offset for the costs associated with a federal loan rate decrease would be defrayed by two factors:  1) The “Buffett Rule” to increase taxes on Americans making more than $1 million a year; 2) The savings that CBO would associate with converting FFEL and private loans to Direct Lending. To achieve budget neutrality S. 2432 also requires the Secretary to estimate the costs of a refinancing program and terminate it once this funding is no longer sufficient.  

CBO and the Joint Committee on Taxation estimated the original Warren bill to increase deficits over the 2015-2019 period by about $19 billion but reduce deficits over the 2015-2024 period by about $22 billion.  Though some projections have as many as 25 million borrowers refinancing through the program, sponsors are confident the relatively small changes of the updated iteration will be covered by the claimed savings.  CBO estimates, using the accounting method required of it, that half of eligible private loans (loans made before July 1, 2013) would be refinanced, generating $5 billion in earnings for the government over 10 years.

Fair-Value accounting vs. Federal Credit Reform Act (FCRA) accounting for federal credit programs is a long-running debate.  CBO has reported FCRA does not accurately reflect the risk associated with federal credit programs, but Section 301(d) of the bill specifically requires this type of accounting.  It states:

When estimating cost and revenue under this section, the Secretary of Education shall utilize the accounting methods and assumptions that are used by the Congressional Budget Office, as of the date of enactment of this Act, to make such estimations.

Though he identified further problems with the bill as the debate continued, when the bill was first introduced, Senate HELP Committee Ranking Member Lamar Alexander (R-TN) expressed his concern over the calculation of the federal cost of the legislation and specifically the use of FCRA accounting. 

“The Democrats’ proposal is starting down the road of turning a trillion dollars of student loans into grants and counting spending in a way that the Congressional Budget Office has told Congress not to do,” Sen. Lamar Alexander (R-TN) said in a statement to Politico. 

However, criticism from Republicans may be just what Warren and her colleagues are seeking.  The refinance legislation, which is part of a broader “Fair Shot” campaign aimed at various aspects of income inequality, has openly been discussed as a “messaging bill” for Democrats who like the contrast between curbing tax benefits for wealthy individuals and providing more benefits for students. 

The legislative text for S. 2432 is available online: http://beta.congress.gov/113/bills/s2432/BILLS-113s2432pcs.pdf