Senator's plan: Let students refi at low rates, too

With more than $1 trillion in student loans outstanding and jobs still so hard to come by that the Federal Reserve is keeping interest rates at historic lows, Sen. Kirsten Gillibrand (D., N.Y.) has put forward a proposal to help both borrowers and, simultaneously, the broader economy: Let student-loan borrowers refinance all their loans at 4 percent annual interest.

Gillibrand calls her proposal the Federal Student Loan Refinancing Act. Like Sen. Elizabeth Warren (D., Mass.), Gillibrand has warned against the doubling of interest rates on subsidized Stafford Loans that's scheduled to take place in July if Congress fails to act, and is backing a proposal to freeze those rates at 3.4 percent.  Warren would go further. Her Bank on Students Loan Fairness Act, which I wrote about here last week, would peg the interest rate on new student loans to the ultra-low discount rate - currently 0.75 percent - that the Fed charges to the nation's largest banks. So far, more than 425,000 people have signed a MoveOn.org petition Warren submitted to stir support for her plan.

Gillibrand's refinancing proposal addresses the broader problem faced by students and former students saddled with unaffordable debt and unable to refinance it - a problem for many in today's marketplace, according to the Consumer Financial Protection Bureau, which has been collecting consumer input and comments about  student loans for the last year.

Worries for some borrowers may be mitigated by programs such as Income-Based Repayment, but others facing deep debt without decent jobs are often left in despair - without even the emergency safety valve offered by bankruptcy.  Under 2005's bankruptcy-law revisions, student loans are not generally dischargeable along with other consumer debt unless the borrower meets a special and ill-defined "undue hardship" standard, although there is some encouraging evidence that judges grant relief to borrowers in genuine distress.

To explain her proposal, which says could help as many as 9 out of 10 student-loan borrowers, Gillibrand's office cited statistics about New York borrowers that are echoed around the country. It said that New York graduates faced an average debt of $27,310 last year and that nearly 11 percent had  defaulted on student loans between 2009 and 2012 or were more than 9 months delinquent in payments.

Gillibrand said a majority of 37 million student-loan borrowers nationwide pay interest rates of 6 percent or more on their loans. Citing a Center for American Progress report, her announcement said:

More questions about student loans? Some of the CFPB's findings on student-loan affordability are available here.