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Is Student Loan Reform Good News for Federal Loan Borrowers?

If Senator Elizabeth Warren of Massachusetts gets her way, there will be good news on the horizon for federal student loan borrowers. Warren recently announced on her blog that she will be introducing new legislation to allow graduates with high interest rate student loans to refinance those loans at rates “at least as low as those now being offered to new borrowers in the federal student loan program.” Warren points out that “when interest rates are low, homeowners can refinance their mortgages. Big corporations can swap more expensive debt for cheaper debt. Even state and local governments have refinanced their debts.” But student loan borrowers cannot currently refinance their debt at prevailing interest rates through any existing federal program. The current federal student loan consolidation program allows borrowers only to lock in a weighted average of all of their existing interest rates, not necessarily get themselves a lower interest rate.

While the details of the proposed loan refinance legislation remain to be seen, we at College Coach support the efforts of Senator Warren in seeking to make student loans more affordable. We do, however, see barriers to student loan repayment success that are not being addressed, and will not be addressed through a simple refinancing plan. Some additional ideas for student loan reform include:

  • Allowing borrowers to shop for a federal loan servicer rather than being locked into an assigned servicer, as competition among servicers may improve borrower services and repayment incentives.
  • Requiring loan servicers to apply prepayments to the highest interest loans by default (rather than applying them to the next month’s payment as some servicers do), and allowing borrowers to choose which of their loans they want prepayments applied to.
  • Requiring loan servicers to provide accelerated repayment schedules upon borrower request.
  • Using the tax return to collect income-based payments in order to simplify the repayment process.
  • Enhancing the Student Loan Interest Deduction to target repayment assistance toward lower-income borrowers.

Few would argue that the current system of student loan repayment is unflawed. As Senator Warren points out in her blog, over a third of borrowers under age thirty are more than 90-days delinquent on their student loans. A loan refinancing plan is one potential solution, but there are also many challenges that borrowers face repaying their loans that are administrative and should be fixable at low cost.

Leave a comment below to tell us what student loan reforms you would like to see.



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Written by Shannon Vasconcelos
Shannon Vasconcelos is a college finance expert at College Coach. Before joining College Coach, she was a Senior Financial Aid Officer at Tufts University and Boston University.