Student Debtors, This Trump Ally Wants to Be Your Friend

Transition Vice Chairman Tom Reed is backing a refinance bill even more liberal than one championed by Elizabeth Warren.

Your Student Loan Company Loves Trump

Watch out, Elizabeth Warren: A Republican lawmaker who’s also a senior member of President-elect Donald Trump’s transition team appears to be vying for the title of Congressional champion of student debtors.

U.S. Representative Tom Reed this week formally endorsed a law originally proposed by House Democrats. Though a long shot, the bill would do more for America’s roughly 42 million student debtors than the one proposed two years ago by Warren, the liberal firebrand from Massachusetts. Democrats didn’t quite know what to make of Reed’s move.

“Heavens, are you sure that happened?” said U.S. Representative John Garamendi, the California Democrat who authored the proposed law that Reed, who represents western New York state, decided to co-sponsor.

The plan calls for allowing debtors with high-rate federal loans to refinance into cheaper debt. Warren has been among the idea’s most outspoken proponents, arguing that it’s unfair that student debtors, unlike homeowners, can’t take advantage of low interest rates to refinance their loans into new government-backed debt. Reed, an early Trump backer and vice chairman of his transition team, said he agrees.

Although a lot of opposition remains among Congressional Republicans, and not to mention the student loan industry, the development prompted at least one analyst who follows higher education policy to opine that the proposal, thought dead after Hillary Clinton’s electoral college loss, might have a shot in the new Congress.

“Donald Trump was delivered to Washington on a populist wave, and ultimately his legislative agenda will embrace that in some way,” said Isaac Boltansky, an analyst in Washington with Compass Point Research & Trading. “Student loan re-fi could be one of those components.”

Trump spokeswoman Hope Hicks and Warren spokeswoman Lacey Rose didn’t respond to requests for comment.

Under Warren’s proposal, student loan refinancing rates would range from 3.86 percent to 6.41 percent, or the interest rates that prevailed during the 2013-14 academic year. The Senate bill’s language reflects a 2013 law that tied interest rates on new student loans to yields on 10-year Treasury notes, with a markup of 2.05 to 4.6 percentage points, depending on the type of loan. The Reed-backed proposal in the House calls for a markup of just 1 percentage point for all loans.

“It is only right that young people who are working hard to pay off their student debt have the opportunity to refinance their loans when interest rates decrease,” Reed said in a document outlining his position. “This solution will have a positive short-term impact by helping students to save money and pay off their loans more quickly.”

Publicly traded Nelnet Inc. and Navient Corp., the two biggest owners of student loans originated under the since-discontinued bank-based federal program, stand to lose future interest revenue if either proposal becomes law. Their combined holdings of about $115 billion in U.S.-guaranteed debt could shrink if borrowers refinance into cheaper obligations made directly by the Department of Education. Both firms have lobbied Congress on student loan refinancing proposals, records show. Patricia Christel, a spokeswoman for Navient, and Ben Kiser,  a spokesman for Nelnet, didn’t respond to requests for comment.

It’s unclear how many borrowers could ultimately benefit under either the Warren or Reed-backed plan, which on the off chance they both passed, would have to be reconciled. The Education Department doesn’t disclose a breakdown detailing interest rates on outstanding federal student loans. A 2013 report by the Center for American Progress, a Washington policy and advocacy organization with close ties to Democrats, found that about 60 percent of all federal student loans carried interest rates above 6 percent.

Both proposals would have to overcome significant opposition from conservative Republicans concerned about the cost of forgoing higher future interest payments, said Brandon Barford, a partner at Beacon Policy Advisors in Washington. The federal student loan program is projected to generate billions of dollars in annual profit for the foreseeable future, but those revenues depend on borrowers paying relatively high rates on their older debt.

Garamendi, the House bill’s author, has no sympathy for that position, nor for Navient and Nelnet, when it comes to high-rate federal student loans that have buried American students for years.

“They should lose,” he said of the companies, adding that investors purchase loans and securities knowing that borrowers may pay off balances early.

But a funny thing happened on the way to Capitol Hill. Enactment of a refinancing law could lead to lower revenue for Navient, potentially affecting jobs. And Navient has an office in Reed’s congressional district—an office that’s scheduled to add an additional 300 jobs thanks to a new collection contract with the Internal Revenue Service. That contract was announced with some fanfare in October by the senior U.S. senator for New York, Charles Schumer. As the incoming Senate minority leader, Schumer is arguably the most powerful Democratic officeholder in the country and someone who may find himself in a difficult position when it comes to student debt reform.

Earlier this year, he helped spearhead Democratic efforts to enact Warren’s refinancing plan, but a few months after those efforts failed, he lauded Navient’s expansion. He said he went to bat for the company in discussions to secure additional government contract work after the Obama administration threatened to bar its debt collection unit from the federal student loan program. Schumer spokesman Matt House didn’t respond to a request for comment.

Garamendi said he’s trying to persuade his Republican colleagues to back the House bill, and implied that Reed’s epiphany may be his doing. For example, while Reed said as early as 2012 that he was in favor of allowing student debtors to refinance, it took him seven months to sign on to Garamendi’s bill. The Republican’s support came after the Democrat’s staff shared its data with him, Garamendi said.

“In discussions I have had with some of the most conservative Tea Party members, they say, ‘You know, this makes a lot of sense,’” Garamendi said.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE