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The Bank on Students Act: What It Is, and How It Could Help Student Borrowers

Jul 1, 2014 Jennifer Williamson, Distance Columnist | 0 Comments

The Bank on Students Emergency Loan Refinancing Act is legislation introduced by Senator Elizabeth Warren. Its purpose is to allow people to refinance their student loans at the current interest rates—which are lower now than they were for many borrowers.

It’s legislation that could wind up helping a lot of people. Some with federal student loans have interest rates as high as 7%; some even higher. However, currently students pay 3.86% for undergraduate loans taken out since introduction of the Bipartisan Student Loan Certainty Act, which was passed in August of 2013.

This legislation could affect as many as 40 million people who are currently paying student loan debt. The average debt load for people holding a Bachelor’s degree is $29,400 as of 2013 surveys; approximately 30% of those holding federal debt are having trouble paying it back and have gone into default, deferment, or forbearance.

One of the benefits of federal student loans is that they are supposed to be more stable than private student loans—with fixed rather than variable interest rates. Fixed rates stay the same regardless of what the market does, while variable rates can change at any time. Fixed rates are better, because they make your interest payment predictable.

It’s true that when you take out or refinance a federal student loan, the interest rate you have at that point is the rate you’ll have throughout the loan’s lifetime. However, federal student loan interest rates have been anything but stable over the past few years. In 2008 and 2009, the interest rate for subsidized Stafford loans was around 6%; it fell to 4.5% in 2010-2011, and in 2011-2012 it went down to 3.4%. Of course, if you took out a loan between 2008 and 2009, you would be stuck with the higher interest rate, even if it went down the next year—that’s a drawback of the fixed rate system.

This new bill seeks to rectify that. Under this bill, students who took out or refinanced during a year with a higher interest rate, they can have the chance to refinance again during a year with a lower interest rate. This could save hundreds or even thousands of dollars every year for many people with student loans.

In 2012, the House of Representatives passed legislation meant to keep the 3.4% interest rate going; this was blocked by Senate Republicans and in July 2012, rates were set to revert back to 6.8%. The partisan arguments held up changes that could have saved students and graduates a lot of money in their student loan interest rates.

Currently, student loan interest rates are tied to the financial market. This was the effect of the Bipartisan Student Loan Certainty Act of 2013: that interest rates would be established each year based on rates associated with high-yield ten-year Treasury notes, plus 2.05%, capping out at 8.25%. Interest rates are currently determined in the spring for the coming award year, and the benefit of the bill is to circumvent partisan bickering. At the moment, interest rates for subsidized Stafford loans are at 4.66%--not as low as it once was, but it could be much worse.

However, it does leave students with loans from traditional or accredited online degree programs vulnerable to getting stuck with higher rates because of market forces out of their control. Hopefully, the Bank on Students Emergency Loan Refinancing Act will give students stuck with high interest rates better options for refinancing—allowing them to take advantage of lower interest rates despite the market’s performance on the year they took out their loan. 


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