NATIONAL — If you took out a loan a few years ago to buy a flashy sports car, you could save buckets of money by refinancing at today’s low rates.
But if you did the smart thing and took out federal student loans to pay for an education — sorry, you are out of luck! Federal student loans cannot be refinanced.
If that sounds insane to you, you will like the plan Sen. Elizabeth Warren unveiled in a speech recently at the Center for American Progress.
Last spring, Congress passed bipartisan legislation to lower student loan interest rates as of July 1, 2013. But they did little for people who already had borrowed at higher rates.
Say you took out a loan even a day earlier, on June 31. At that point, the congressionally mandated rate was 6.8%. You are locked into it. No matter what else Congress does to help new borrowers.
Unlike almost every other type of loan, federal student loans are set in stone even if rates change for the better. (There are private refinancing options but they have strict requirements and limited scope.) This might not constitute a crisis if college cost what it did in the 1970s. But with middle class wages flat for decades, the soaring cost of education has become a mammoth debt dilemma dragging down an entire generation.
Today, Americans hold an all-time record $1.3 trillion in student debt. It cannot be discharged by bankruptcy or even death. In some cases, Social Security benefits are being garnished to pay for a grandchild’s debt if a grandparent co-signed. Parents are still paying off their own bills while contemplating putting their kids through college.
The solution is simple: Let Americans with federal student loans refinance to today’s low rate. But the reason why Congress refuses to act may surprise you.
It turns out, the U.S. government is making a killing off these high-interest loans. Keeping Americans locked into interest rates of nearly 7% when borrowing costs are so low results in a tremendous profit.
Last year, the Congressional Budget Office estimated that the 6.8% interest rate would earn the government about $184 billion over the next 10 years.
It would be one thing if we were pumping that profit back into the middle class economy in the form of public works programs, green technology investments or job retraining. But most of those proposals have died in Congress.
Instead, we are plowing all that money earned off the backs of young people into subsidies for oil companies and tax breaks for people who own yachts. And too many in Congress refuse to end these handouts in order to help people with student loans.
In short, we are taking money from middle-class students and handing it to the worst of the 1%. Sen. Warren’s plan would flip the script.
Her idea is to make up for lost revenue from student loan refinancing by making sure millionaires do not pay a lower tax rate than their assistants.
She is not the first to propose refinancing for federal student loans. Nor did she come up with the idea of the “Buffett Rule,” a minimum tax on millionaires that the Joint Committee on Taxation estimates would raise $47 billion over 10 years, or an average of just under $5 billion per year. President Obama first proposed the tax in 2011, naming it after the acclaimed Warren Buffett, who notes that many millionaires pay a lower tax rate than their assistants.
Sen. Warren’s step forward was combining the two. Suddenly, members of Congress worried about lost revenue no longer have an excuse. And those who oppose fair taxes now have to explain why they care more about hedge fund managers than middle-class families trying to pay for college.
We can save Americans thousands of dollars. Put money back in the pockets of families who invested in education. Create jobs from the middle class out. And do it without adding a dime to the deficit — simply by putting in place a fair tax code and then allowing people to refinance federal student loans.
Even the kid who took out a loan for a sports car instead of going to college can figure out this makes sense. Can Congress?
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