President Barack Obama during his State of the Union address reiterated his support for a federal plan to allow Americans with expensive federal student debt to refinance into cheaper loans.
About 41 million Americans owe a combined .3 trillion on their student loans, according to data from the Federal Reserve and the U.S. Department of Education. Unpaid debts have doubled since 2008, making student loans the second-biggest source of household debt after home mortgages. The average debtor with federal student loans owes nearly ,000.
“I want to work with this Congress, to make sure those already burdened with student loans can reduce their monthly payments, so that student debt doesn’t derail anyone’s dreams,” Obama said Tuesday evening.
The most popular version of the proposal, championed last year by Sen. Elizabeth Warren (D-Mass.), would have given millions of borrowers the opportunity to lower their monthly federal student loan payments. Obama and a majority of the Senate supported Warren’s plan, but nearly all Senate Republicans blocked it from advancing.
Under the plan, borrowers with student loans would be able to refinance debts that sometimes exceed 10 percent into new loans ranging from 3.86 percent to 6.41 percent.
The state of California recently enacted a similar plan into law, giving potentially thousands of borrowers with student loans the opportunity to refinance into cheaper debts. Prominent bankers and financiers, as well as federal policymakers, have been warning about the dangers of mounting student debt burdens for about two years. Many experts suspect that student loans are holding back key parts of the economy, and risk doing so for the foreseeable future.
Warren’s plan failed to advance in large part because most Republicans refused to consider a a tax increase on the richest households to pay for it. When borrowers with loans refinance into cheaper debts, the owners of the loans – in this case, the U.S. government – suffer losses because of reduced future interest payments.
In Warren’s plan, those losses would largely be borne by the richest U.S. households, who would have to pay higher taxes in order to fund the refinancing scheme.
The richest U.S. households have generally fared the best during the current economic recovery, which followed the Great Recession.
Warren’s bill failed in the Senate in June about a week after Obama endorsed it. Obama’s reference to the plan Tuesday night may cement it as a key Democratic issue for candidates in future national elections.
– Shahien Nasiripour