Student loan debt is back in the news with the launch of a campaign by progressive education advocates, dubbed “Higher Ed, Not Debt,” aimed at aiding borrowers and reducing college costs. A leading voice in this effort is Senator Elizabeth Warren of Massachusetts, who plans to introduce legislation that would allow borrowers to refinance their existing loans at lower interest rates.

Sen. Warren’s proposal has some intuitive appeal, as she describes it: “The idea is pretty simple. When interest rates are low, homeowners can refinance their mortgages. Big corporations can swap more expensive debt for cheaper debt … But a graduate who took out an unsubsidized loan before July 1 of last year is locked into an interest rate of nearly 7 percent. Older loans run 8%, 9% and higher.”

This plan also has obvious appeal in light of frequent media coverage about households struggling to repay student loan debts. But it represents a fundamental shift from a federal lending program that has historically acted more or less like a bank—with the goal that student loans will be roughly budget neutral in the long run—to something that more closely resembles an entitlement program. Allowing borrowers to refinance their loans at below-market rates with the government would lead to a potentially large increase in the cost of the program, which would have to be funded through a general increase in interest rates or revenue from other sources.

The proposal pursues the latter course, suggesting that loan refinancing could be paid for by a tax increase on wealthy individuals commonly called the “Buffett Rule.” Government programs that redistribute resources, usually from wealthier to less well-off individuals, are not uncommon. And it seems, as the narrative about the proposal suggests, that reducing interest rates on outstanding debts would put money back into the pockets of the households that need it the most. Unfortunately, the plan fails to achieve this objective. In fact, the plan is largely regressive and not the least bit progressive.

Refinancing loans provides the greatest benefit to borrowers with large outstanding debts.[i] This doesn’t seem like such a bad thing until you realize that households with large outstanding debts tend, on average, to be high-income households. Many borrowers who take on large debts do so in order to pursue degrees that lead to high incomes, in fields such as law and medicine. These are not the same households who are struggling financially and are perhaps in need of a bailout.

>We illustrate this point using data from the 2010 Survey of Consumer Finances (SCF), a nationally representative survey of U.S. households administered by the Federal Reserve Board. We calculate how much outstanding education debt is held by each household headed by individual(s) aged 25-40, and relate it to the total income of the household.[ii] Households with more debt will receive greater benefits from a reduction in interest rates.

The figure below shows that higher-income households hold a disproportionate share of student loan debt. The richest 25 percent of families hold 40 percent of the student loans, so would receive roughly 40 percent of the benefits of a proposal that allowed all loan debt to be refinanced at lower rates. On the other side of the income spectrum, the poorest quarter of households would receive less than one-fifth of the benefits of such a proposal.









