Low Interest Rates Prompt Proposals to Change Student-Loan Consolidation Limits
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Written by David S. Nelson
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Sunday, 25 December 2011 |
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RECORD-LOW interest rates have made borrowers who consolidated their student loans several years ago -- and locked in what are now considered high rates -- wish they could do it all over again. But under federal law they get only one chance, leaving many disgruntled borrowers to call their Congressional representatives in recent weeks to complain that they, too, want to take advantage of lower interest rates.
Responding to that pressure, some Democratic members of Congress are leading a push for legislation that would allow borrowers to consolidate their loans multiple times. Reps. Rosa L. DeLauro, of Connecticut; Danny K. Davis, of Illinois; and David Wu, of Oregon, have each introduced bills.
Loan consolidation lets borrowers combine several student loans into one and then lock in a single interest rate. This month, that interest rate fell to a record low of 3.4 percent. Consolidating loans for a second time could mean substantial savings for some borrowers, especially those who combined their loans three years ago when rates were around 8 percent. For example, a $25,000 loan repaid over 20 years at that rate would cost about $15,000 more than the same loan balance at 3.5 percent.
"It would provide tremendous relief," said Lesley Sillaman, Representative DeLauro's press secretary. "The point here is to make student-loan debt more manageable and college education more affordable."
ONE LONG-SOUGHT PROVISION
The legislation introduced by Mr. Wu has 52 co-sponsors and several controversial provisions, including one change long sought by Republicans. Last year, lobbyists for Sallie Mae and some other lenders pressed the Bush administration and Republican Congressional leaders to change the interest rate on consolidated loans from a fixed to a variable rate, to make loan consolidation a less attractive option for borrowers. After coming under a firestorm of criticism from advocates for students, college lobbyists, and Democratic lawmakers, the White House abandoned the proposal.
The bill from Mr. Wu is a compromise of sorts. It would create a variable interest rate for consolidated loans, but would cap the rate at 6.8 percent, said Cameron Johnson, a spokesman for Representative Wu. Officials with Sallie Mae declined to comment on whether they would support a cap on the variable rate that is set at such a relatively low level.
Another contentious provision of Mr. Wu's bill would eliminate the "single-holder rule," a longtime target of loan-consolidation companies. The rule requires borrowers to consolidate multiple student loans with their current holder, unless they have loans with more than one holder, in which case they can refinance them with any lender. Elimination of the rule would be a bonanza for loan-consolidation companies, which hope to lure borrowers away from more established lenders. The more-established lenders have been fairly quiet about the consolidation proposals being discussed, but it is unlikely that they would let the single-holder rule die without a fight.
COST TO FEDERAL GOVERNMENT
The proposals to let borrowers consolidate their loans more than once face significant opposition in Congress from critics who say the federal government will end up footing the bill in terms of lost interest, and possibly compensation to lenders for offering lower rates. To cover the potential costs to the government -- and to deter borrowers from consolidating frequently -- Mr. Wu's proposal includes a fee of one-half of 1 percent each time borrowers consolidate their loans, but some say that is not enough.
"It really is a matter of, which group of program participants are you going to take care of?" says John E. Dean, special counsel for the Consumer Bankers Association, which is critical of the consolidation process. "It may be fiscally impossible to offer both generous reconsolidation and take care of current and future students at the same time."
The savings for borrowers will cost lenders, not the government or students, said Jim Newell, vice president for government relations for Collegiate Funding Services, a loan-consolidation company. "We've listened to people cry crocodile tears over the costs of reconsolidation," he said. While government officials say it will cost the federal treasury "a boatload," Mr. Newell said those costs would be offset by fees the government charges to lenders for managing the loans. Between 1995 and 2002, he said, the government collected some $1.3-billion in fees.
Other supporters of the bills make no apologies for helping borrowers, even at the expense of the lenders. "The reality is that in our country all of the indicators suggest that rich people are getting richer and poor people are getting poorer," Representative Davis said. "If you've got enough money, and all you do is let other people use it, and you continue to get rates for the use of it, then you're at a serious advantage. So that argument doesn't play too well with me."
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Last Updated ( Sunday, 25 December 2011 )
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