Will the US Government Be a Student Loan Refi Competitor in 2021?
5 min read
Written by: Mike Decktor, General Counsel & Director of Compliance at Anovaa
As we know, the US government under the new administration is targeting the area of education finance as a specific area of Policy Priority. Considering Loan Forgiveness, Loan Rebates, the Freeze of repayment requirements and others, one area that remains murky is IF and WHEN the federal government will turn its attention to the Education Refinancing World. Here’s what we know so far.
Current Landscape: Currently there is no federal education loan refinancing program. In the 116th Congress (2019-2020), Senator Elizabeth Warren and Congressman Joe Courtney proposed a joint House and Senate bill to create a Federally funded Loan Refinance program (House Bill, Senate Bill). That bill, titled “Bank on Students Coronavirus Emergency Loan Refinancing Act of 2020,” was not passed by either Chamber and ultimately died as the 199th session closed. We do suspect that this bill will be “revived” at some point in the near future, and with the change in administration, likely meet with a much friendlier reception and there is a high likelihood that it could become law in the near to mid-term future.
Summary of the Proposed Bill: This bill establishes refinancing programs for federal and private student loans. Specifically, it allows certain borrowers to refinance their federal student loans down to lower interest rates, and creates the Federal Direct Refinanced Private Loan to allow certain borrowers to refinance their private student loans.
Detail: The bill established three classes of refinance programs:
- Refinance of Federal Education Loans: This program would operate to create a federally funded Loan Program that would allow holders of Federal Direct Stafford Loan, a Federal Direct Unsubsidized Stafford Loan, or a Federal Direct PLUS Loan into a Federal Direct Refinance Loan which would be issued at the lowest available Federal Stafford Rate from the prior year.
- Refinance & Consolidation of Federal Education Loans: This program would operate to create a federally funded Loan Program that would allow holders of Federal Direct Stafford Loan, a Federal Direct Unsubsidized Stafford Loan, a Federal Direct PLUS Loan, a FFEL Loan, Perkins Loan, OR PHSA Student Loan into a Federal Direct Consolidation Loan which would be issued at a weighted average of the Consolidated Loans.
- Refinance & Consolidation of Privately Issued Education Loans: This
program would operate to create a federally funded Loan Program that would allow holders of Privately held education loans into a Federal Direct Consolidation Loan which would be issued at the lowest available Federal Stafford Rate from the prior year.- This private option would also require that ALL private Student Lenders send a notice to their customers about the new Federal option within 120 days of the law’s passage.
What Does it All Mean? Sooner rather than later, the Private Student Loan Refinance and Consolidation Market will not be so “private.” And while historically government issued rates are higher than those offered by Private Lenders, there may be other elements of the federal program that outweigh a moderate ultimate savings on interest spend. For example, the benefits of Federal Forbearance and Loan Forgiveness would be offered to those holding these federally issued loans, while Private Loan holders will be left to fend for themselves.
Zooming that concept into the “now,” where the government is, as we speak, considering as much as a $50,000 per borrower forgiveness program, Private lenders will want to be ready and start planning for how they will alter, amend and initiate programs to accommodate the changing landscape and the possibility of this option set becoming a reality for their borrowers.