Here is the press release. In an earlier post ("Will there eventually be a private loan refinancing boom?"), I had noted that the high margins on private loans today would open up a refinancing opportunity. I had not thought that the government would step into this role, but what do you expect from an entrepreneur who expected that private capital would see the opportunity and step in?
Here are the details of Senator Brown's plan:
- Those borrowers with private loans and available Stafford loan capacity could swap their private loans for an unsubsidized Stafford loan:
"Under Brown’s “debt swap” bill, Americans with private student loans
who were eligible for the federal Stafford program but did not utilize
their full allowance would be able to refinance into low-interest,
unsubsidized Stafford loans, which carry a 6.8 percent fixed interest
rate."
- Here is the mechanics of how it would work:
"Debt swap" would allow a college graduate who finished school five
years ago and now finds him or herself saddled with $8,000 in private
student loan debt to refinance. If the borrower was paying a typical
private interest rate of 12-15 percent or higher, he or she would be
able to refinance that debt into a new unsubsidized Stafford loan
carrying a statutorily-determined, fixed interest rate of 6.8%. It’s
estimated that this borrower would save more than $2,000 in interest
payments over the life of the loan."
- No cost to taxpayers:
"The “debt swap” proposal would come at no cost to taxpayers, because
unsubsidized Stafford loans generate a small amount of revenue,
according to the Congressional Budget Office."
- Eligibility limited to private loans prior to 7/1/2010 and borrowers would have until 7/1/2011 to apply:
"Brown’s bill would only apply to private loans made before July 1, 2010
– and the window of opportunity to get a debt swap loan closes on July
1, 2011."
- Department of Education would be responsible for major public awareness campaign to make private loan borrowers aware of this opportunity (in audio clip below).
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Questions:
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Here is Senator Brown summarizing his bill (kind of annoying to be split into six sections since it is only a few minutes long in total):
Questions:
- Would the current Stafford loan limits of $31,000 for dependent and $39,000 for independent students be utilized to determine capacity?
- Only the $31,000 figure was mentioned in the press release
- If the dependent and independent limits were utilized, this would leverage the program further for those students who were once dependent but now find themselves in an independent status from their parents.
- For those swapping their private loan debt into an unsubsidized Stafford loan, what loan term would apply?
- It would appear that these loans would be serviced "under the same terms and conditions as other federal student loans."
- In determining how much capacity a borrower has available under this program, how would their existing Stafford loans be counted?
- Would it be the amount that was originally disbursed to them?
- Stafford balances owed at graduation (which would included accrued interest for unsub. loans)?
- Stafford balances owed at time of debt swap?
- What involvement will private lenders have in increasing public awareness of this program?
- Obviously, since they have relationship with the borrower, this would have the greatest impact.
- They might have mixed feelings: While lenders would probably be happy to move those borrowers in default or with a high potential for default over to the government plan, they will not be happy to see the high-margin loans in their private loan portfolios paid off earlier.
- Raises an interesting question as to whether borrowers in default with their private loans would be allowed to participate in the debt swap
- May be good from public policy perspective to assist these distressed borrowers, however would increase potential cost to taxpayers if they were represented disproportionately in the program
- Raises an interesting question as to whether borrowers in default with their private loans would be allowed to participate in the debt swap
- How will they mitigate the risk of low participation risks?
- As this post indicates, it has been a relatively recent phenomenon which has seen margins on private student loans go to LIBOR + 10%. Back in 2007, the average interest rate on private loans was in the neighborhood of LIBOR + 5%, which would equate to about 5.5% to 6.0% today.
- Hopefully, the awareness campaign makes borrowers aware of the benefit of having a fixed rate loan since as this post indicates that average LIBOR rate over a 20 year period is about 4% higher than current levels since many may have loans under the 6.8% Stafford loan rate.
- As this post indicates, it has been a relatively recent phenomenon which has seen margins on private student loans go to LIBOR + 10%. Back in 2007, the average interest rate on private loans was in the neighborhood of LIBOR + 5%, which would equate to about 5.5% to 6.0% today.
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Here is Senator Brown summarizing his bill (kind of annoying to be split into six sections since it is only a few minutes long in total):
Is there any help for co-signers of private loans after the primary signer defaults?
Posted by: Bob Matchison | July 30, 2009 at 06:15 AM