The more things change, the more they stay the same.
That expression is the first thing that came to mind when I read the Student Loan Relief Act of 2015 (S.2099), which was recently introduced by Sens. Kelly Ayotte (R-N.H.) and Shelley Moore Capito (R-W.Va.).
Essentially, the bill proposes to pave the way for federal student loan borrowers to refinance their presumably higher-rate, publically financed debts with potentially lower-rate private-sector loans at no cost to taxpayers.
Sounds fabulous. If only it were true.
Let’s start with the wording in Section 102(a)1, which speaks to the rates that student-loan borrowers can expect to pay when they refinance their Federal Direct and FFEL loans. It reads: “… to ensure that borrowers pay lower interest rates that are commensurate with credit risk.”
Commensurate with credit risk?
That doesn’t quite square with Section 102(a)3, which states that the “… private loan that results from refinancing under a program established under the authority of this section shall receive a Federal Government guarantee of 95 percent of the private loan, including accrued interest on such loan.”
If the government continues to backstop these debts well after the time the contracts leave the Department of Education’s balance sheet, why should the borrower’s creditworthiness come into play? For the 5% risk that the private sector is being asked to bear on loans that are virtually impossible to discharge in bankruptcy—loans that may end up being paid through the garnishment of the debtor’s Social Security benefits?
Clearly, this wording opens the door for private-sector lenders to impose whatever pricing they have in mind. There is also nothing to prevent them from pitching lower-cost variable-rate loans to borrowers who happen to have higher-rate, fixed-rate loans — that is, until interest rates begin to escalate. And what’s to stop lenders from demanding loan co-signers too?