Congress could wind up denying borrowers a chance to refinance when interest rates decline

First published: Sunday, November 27, 2005

While Congress has been battling over how much to cut student loan programs, another aspect of this debate has been largely overlooked -- namely, the move to prevent students and former students from refinancing their loans whenever interest rates decline. That's unduly punitive.
The magnitude of the proposed cuts in student loan programs -- $14.3 billion in the House, $8.8 billion in the Senate -- is unjustified as well. The cuts are being touted as necessary to rein in government spending and keep the budget deficits under control. But Congress has plenty of other places to look for economies -- by refusing to phase in more of President Bush's $1.8 trillion tax cut plan, for example.
Instead, the Republican-led House and Senate keep moving ahead with plans to approve a staggering $57 billion more in tax cuts over five years, even as they search for savings of $50 billion during the same period in Medicaid, home heating assistance, Food Stamps and other programs that help struggling Americans.
The student loan programs would take a huge hit. They now amount to $37 billion. Supporters of the cuts defend them largely on the grounds that much of the money represents unjustified subsidies to lenders, but even so, it means less cash for students who need to finance their education. The House's proposed $14.3 billion cut would be savage. And the Senate's proposed $8.8 billion cut, while slightly more reasonable, would still be Draconian.
But when it comes to a double whammy, students and former students who are paying off their loans are in a special class. The House is said to favor making permanent a provision in current law that prohibits borrowers from renegotiating interest rates more than once in the lifetime of a loan. That contrasts with the flurry of refinancing whenever mortgage interest rates decline.
Back when Sallie Mae, a major education finance company, was a quasi-public agency, this provision made sense. But Sallie Mae is now in the private marketplace and, by some estimates, is enjoying profits of some $1 billion a year. At the same time, the government shields lenders from bad student loans by denying borrowers the right to write them off by declaring bankruptcy.
Sallie Mae argues that it bore the cost of originating and servicing billions of dollars in student loans that could be raided by competitors if unlimited refinancing were allowed. True enough. But that argument is plausible only for a limited period, as Sallie Mae adjusts to losing the advantages of being a quasi-public entity. At some point, though -- sooner rather than later -- Sallie Mae must be required to play by the rules of the private marketplace.