July 27, 2003
Student loan refinancing rules debated
By PAUL M. KRAWZAK
Copley News Service
WASHINGTON — With $17,000 to pay off, Darcy Hamlin’s student-loan debt from college is about average.
The 32-year-old French horn player — who was with the Canton Symphony — has no regrets; the federally subsidized loans helped finance a musical education that recently helped her land a coveted spot in the Milwaukee Symphony.
But the last several years have been a struggle.
“Not because of the loans themselves but because of my lifestyle, because I’ve been living as a freelance musician,” said Hamlin, who made her payments more manageable by consolidating several loans into a single payment in 1994.
But what looked like a low interest rate in 1994 isn’t today. And the student-loan rules keep Hamlin and others like her from taking advantage of today’s historically low rates.
Record numbers of former students have been consolidating and refinancing their loans to reduce their payments.
But unlike home mortgages, student loans may be refinanced just once.
The government-backed student loan system has another restriction: Borrowers with loans from different lenders can consolidate their debt with their choice of financial organizations. But those whose loans from just one single entity can refinance only with that lender.
A handful of lawmakers, including Rep. Ralph Regula, R-Bethlehem Township, are trying to change the rules to increase the ability of borrowers to lock in the lowest interest rates.
Regula testified before a House Education and Workforce subcommittee last week for a bill he introduced to eliminate restrictions on where a borrower can refinance.
While it is not part of his bill, Regula said he also favors allowing borrowers to refinance as many times as they wish.
But he said there’s no need to add the multiple refinancing provision to his bill, since it is contained in other legislation before the committee.
“The way to deal with this is for the committee to ... try to meld this into something that will work well for borrowers,” he said.
The lending industry doesn’t like the refinancing proposals.
It argues they would destabilize the student loan market by making the revenue less predictable for lenders.
June McCormack, executive vice president of Sallie Mae, the nation’s largest provider of student loans, told Congress last week that the uncertainty created by changes would compromise the ability of lenders to invest in and improve the loan program.
Unlike mortgages, student loans are subsidized and guaranteed by the federal government.
Recipients of student loans pay a below-market interest rate, which is tied to a Treasury bill rate. Lenders get a higher rate, which is linked to other interest rates. The government makes up the difference between what the student pays and the lender receives.
For example, a student paying off a loan last month would have paid 3.42 percent in interest, while the lender collecting on that loan would have received 4.18 percent in interest. The government paid the difference between the student and lender rates.
Another argument against refinancing is that it will increase costs for the government, and thus taxpayers.
Student loans issued since 1992 have carried variable rates, which change yearly. When they are refinanced, they go to a fixed, permanent rate.
As interest rates rise, as they are bound to do, the spread will increase between the student’s fixed rate and the rising variable rate of interest owed to the lender.
Based on interest rate projections, the $28 billion worth of student loans that were consolidated last year will cost the government an additional $4 billion, McCormack said.
Regula is skeptical that the government will incur increased costs.
“Until somebody demonstrates to me with numbers, I’m not so sure that I accept the notion that this is going to have a significant budget impact,” he said.