“NO” on Elizabeth Warren’s Student Loan Bill

This week the Senate will vote on the Bank on Students Emergency Loan Refinancing Act (S. 2432), introduced by Sen. Elizabeth Warren (D-MA) 19%.  The bill would allow borrowers with older student loans — nearly 40 million individuals with more than $1 trillion in student loan debt — to refinance at the rates established in 2013 for new, taxpayer-backed student loans. The bill would be paid for by raising taxes for families and small businesses making more than $1 million, the so-called Buffett Rule.

College tuition has risen significantly.  The Heritage Foundation notes, “Since 1982, the cost of attending college has increased 439 percent, more than four times the rate of inflation. Increases in college costs exceed increases in health care costs, which have risen more than 250 percent over the same time period.”  But while real efforts to drive down the cost of college tuition are necessary, Warren’s proposal would only result in more harm.  

Under current law, regulations cap what students can be required to repay at just 10 percent of discretionary income.  After 20 years, they can be granted loan forgiveness (just 10 years for those in public service).  Warren’s plan would expand the Department of Education’s Direct Loan Program to refinance both public and private student loans.  The feds would pay off private lenders and issue low-interest government loans to take their place.  However, the plan would essentially allow Washington to seize the profits of private lenders, who already have to compete with artificially low interest rates on taxpayer-funded, federal loans.

According to the Congressional Budget Office (CBO), the plan would encourage students to delay their student loan repayments, resulting in eventual loan forgiveness, “features of the income-based repayment plans offered under current law.”  The CBO found it would also “increase direct spending by about $58 billion” over the next decade, which likely underestimates the long-term cost to taxpayers because the CBO does not use fair-value accounting to accurately measure risk.

Not only will taxpayers be taxed according to the Buffett Rule, but they will be subjected to a greater degree of risk, especially because Warren’s plan fails to use fair value accounting.  The Heritage Foundation’s Lindsey Burke explains:

How much will the loan refinancing cost taxpayers? We don’t really know. The Congressional Budget Office estimated that refinancing — along with the millionaire’s tax — would actually increase federal revenues by $72.5 billion over the first 10 years. But — and this is a huge “but” — that estimate does not take into account actual market risk.

As the budget office has explained in previous analyses, “The government is exposed to market risk when the economy is weak because borrowers default on their debt obligations more frequently and recoveries from borrowers are lower.” A fair-value estimate of Ms. Warren’s proposal would account for that risk, producing a more accurate reflection of the true cost of her proposal. But the budget office has yet to issue a fair-value analysis of the refinancing proposal.

Beyond harming students, private lenders, and taxpayers, Warren’s proposal would have broader negative effects on the economy.  Heritage experts say adopting the Buffett Rule “would put a severe drag on economic growth and job creation.”

On both higher education and taxes, Sen. Warren gets it wrong.

Heritage Action opposes S. 2432 and will include it as a vote on our legislative scorecard.

Related:

Elizabeth Warren leaves taxpayers on hook for more student loan subsidies
Elizabeth Warren: Tax the Rich to Let Students Pay Off College Loans