You may have heard recent buzz over newly proposed legislation that would allow students and former students to refinance their student loans. But what does this really mean to you?
The proposed law would attempt to afford students who have already taken out student loans at fixed rates to refinance these loans. Essentially what this would allow student to do is take advantage of the current lower interest rates that apply to new student loans. Sponsors of the legislation argue that allowing students to refinance their student debt is no different than the ability to refinance home debt or business debt. While borrowers can currently refinance other types of loans, it only seems fitting that students, who carry “good debt,” be allowed to do the same.
If legislation passes, students will be in a better position to control their financial futures. They will gain a greater ability to raise a family and to save for retirement, which is an area where the majority of Americans are in desperate need of help. Senator Elizabeth Warren, who is co-sponsor of the proposed legislation, has been quoted as saying, “The student loan debt is crushing our young people: At the moment they are beginning their economic lives, debt is dragging them backwards…Young people can’t move out of their parents’ homes, can’t save for a down payment, can’t buy a home, can’t buy cars, can’t save to build an economic future for themselves.”
Time will tell whether this will become law, but the fact that it has been proposed is a step toward that direction. The bill (S. 1066) will be voted on in the Senate later this month. That bill has a sister in the House: H.R. 4622. You can write your lawmakers and urge them to support both bills using ASDA’s advocacy alert system, Engage. Click here to take action now!
~Megan Mathers, JD, Pesavento & Pesavento
As for that suggestion: “… take advantage of the current lower interest rates that apply to new student loans …” – I should like to think that this is nonsense concocted by politicians illiterate in the way credit contracts work. A bank or lender who lends a person money for a certain period of time refinances this credit himself in the market (as a general rule). Also in general this refinancing spans exactly the same time frame that the money lent will not be callable upon. If you FORCE a lender to accept refinancing what you are saying is that they need to assume more risk up front, so … all other things being equal, (future) student loans’ interest rates will rise by the same amount that lenders expect creditors to in future walk out on them when (general!) interest rates fall. Remember: they never fall retroactively! Or, to turn the tables: what would you say if a lender could equally turn around and at a later date RAISE their interest rates if general market rates rose too. Instead they have to calmly wait it out for the full term. You can only have it both ways, and the latter arrangement will hurt students a lot more!
I can see the logic in what you’re trying to say, but when the government is the lender, it would not be FORCING it upon a private lender. The above bill would require a change in the budget. Interest rates on student loans in previous years were WELL above market interest rates of the same time. With fixed rates, in contrast to adjustable rate loans, these types of loans have had the OPTION of refinancing at lower rates. Private lenders allow such refinancing after ASSESSING their risk of doing so. If you are someone who is working and paying off their debt in a patterned manner, the risk is low to the lender upon refinancing.