Sen. Kelly Ayotte (R-NH) and Sen. Shelley Moore (R-WV) introduced the Student Loan Relief Act of 2015 on Thursday, which would let borrowers refinance their federal student loans in the private market. The senators argue that if their legislation passed, students would be able to benefit from lower interest rates.
“Our legislation would give borrowers flexibility, allowing them to save money by refinancing their student loans the way they would refinance a mortgage. And to better support our younger generation of workers, this bill would allow employers to help qualified employees pay off their student loan debt with pre-tax dollars,” Ayotte said in her announcement about the introduction of the legislation.
Despite the framing of the legislation as beneficial to students, it’s really the private market that has the most to gain from this bill. This bill would also provide a loan guarantee for refinanced loans. To better understand why Republican lawmakers are pushing for this bill, it’s important to remember that in 2010, The Affordable Care Act contained a reconciliation bill that meant all student loans would originate with the federal government compared to the old system, when 55 percent of those loans originated with banks. The federal government used to pay the banks more than the cost of the loans, which meant the change would actually save taxpayer money.
When the bank-based student loan system ended in 2010, most conservatives opposed efforts to change the system, even though it would cost far less if the government took on those responsibilities. Several institutions that benefitted from the old bank-based system were allowed to become student loan servicers after the change, but this bill would allow them a way back into issuing loans.
Although many large banks left the private student loan market after the financial crisis, plenty of politically connected organizations such as state agency lenders and nonprofits have fought to stay in the market. One example is Granite State Management, a New Hampshire nonprofit organization that does student loan servicing. GSM’s primary income is through its student loan servicing, but they would make much more through issuing loans. GSM’s status as a charitable organization was challenged by the City of Concord in 2013 but the court ultimately held up its status, saying that “servicing and administration of loans is not GSMR’s charitable purpose, but a means to achieve” the purpose of its mission to “providing low cost or alternative financial assistance to eligible students and to parents . . . and of supporting the development of higher education and educational opportunities.”
“What they’re trying to do is go back to the bad old days of a bank-based loan system. They want private banks to take over the loan and take none of the risk. So what they’re saying is, ‘Oh, it will be good for students because they will get a lower rate from the private market,’” said Ben Miller, senior director for postsecondary education at the Center for American Progress. “But really what’s going to happen is that the private market is going to get a giant windfall and pass along a tiny slice of it to the students in the form of a lower interest rate … You would hope to do a lot more by spending the exact same amount of money and just cutting their interest rates. There is no value add from the private market.”
Miller said that these organizations were allowed some protections after the Health Care and Education Reconciliation Act of 2010 ended the Federal Family Education Loan Program, through which which nonprofit and state agency lenders issued loans and borrower outreach programs, Congress allowed these groups to service loans so that they could remain involved in the student loan market.
In 2010, Sen. Tom Harkin (D-IA) spoke about the importance of keeping these organizations involved in the student loan market:
These changes will also upgrade the customer service borrowers receive when repaying their loans. The legislation will also maintain jobs by ensuring a robust role for the private sector, allowing lenders and not-for-profits to contract with the Department of Education to service Direct Loans.
“They weren’t based by the whole faith and credit of the state but they were quasi-state agencies, and so when this change went through in 2010 they were given a giveaway, where they said you can stay in the loan program as a servicer,” Miller said. “So they already got this sweet grandfathered deal and this would be another example of catering to do with local interests … Student loan servicers get three-fourths of the student loan volume every year. That’s more than they actually used to get.”
These organizations are still hoping to increase their share of new student loan volume, however. In July, The White House sent a letter to Sen. Thad Cochran (R-MS), chairman of the Senate Appropriations Committee, highlighting several problems the administration had with the fiscal year 2016 Labor, Health and Human Services, Education, and Related Agencies appropriations bill. One of those criticisms was of a rider that would benefit nonprofit student loan servicers.
Shaun Donovan, director of management and budget for The White House wrote, “The bill also includes highly objectionable language that would allocate 50 percent of new student loan volume to not-for-profit loan servicers, violating the terms of the current performance-based contracts which allocate volume based on servicer performance in keeping borrowers current on their student loans. This provision would prioritizes special interests over borrowers’ access to high-quality loan servicing.”
Miller isn’t optimistic that nonprofit student loan servicers would get the benefits Ayotte and Moore’s legislation would provide, because such a bill would require reversing the department’s 2010 decision and actually cost more money than keeping the current system.
“As much as many people would like to generate bad policy proposals that funnel taxpayer dollars into the private sector, it costs money and there isn’t money to be spent,” Miller said. “So I think that if they found the money to do it they would have support, but the reason why this change was made in the first place was because it was cheaper for the government to make the loan than have the bank do it. Undoing that costs money.”