Gan Golan, of Los Angeles, dressed as the “Master of Degree,” holds a ball and chain representing his college loan debt at “occupy” Freedom Plaza in Washington.(AP Photo/Jacquelyn Martin)
The Senate has officially left town for the upcoming holiday without passing a student loan fix, meaning that the interest rate on federal loans available to low-income students will double on Monday.
Judging from the proposals being discussed, it looks like the best Congress can do is to retroactively extend current rates for a year, and take up the thornier question of a long-term fix when the Higher Education Act comes up for reauthorization in 2014.
That’s an important issue, but student advocates point out that lowering interest rates are only a piece of the comprehensive reform needed to alleviate the debt burden crushing students and holding back the economy. “The interest rate issue has gotten so much attention it’s crowded out the debate about, first of all, how to help existing borrowers with their debt,” said Deanne Loonin, an attorney at the National Consumer Law Center. “The debate really has gotten distorted.”
The scheduled increase from 3.4 to 6.8 percent applies only to new subsidized Stafford loans, which represent about 35 percent of the education loan market. It wouldn’t affect the 37 million Americans already shouldering nearly $1.2 trillion in debt. The July 1 deadlines does not affect unsubsidized Stafford loans available to “wealthier” students (about two-thirds of subsidized Stafford Loans are awarded to students with family income of less than $50,000) nor PLUS loans for parents and graduate students, which together make up the bulk of federal lending and already have high interest rates.
It’s not that the rate increase is not important—it’s just a small piece of the debate. “A rate increase will have a large impact on many borrowers, in how much they pay over the life of their loans,” said Loonin, an expert on the student loan industry. “But even for perspective borrowers there are a lot of other options to look at beyond the interest rates.”
The best way to puncture the student debt balloon would be to limit the use of student loans in the first place—in other words, to increase grants and scholarships, ensure they’re targeted at needy families, and boost their buying power, ultimately by controlling the cost of higher education.
Here are three straightforward ways to help current and future borrowers:
Strengthen income-based repayment programs. There are several federal programs that allow borrowers with government debt who meet certain standards to cap their payments as a percentage of their earnings—but too few sign up for them. More than 5 million people are behind on their student loan payments to the government, but just over 1 million are enrolled in one of these programs. It’s simply a matter of students not being aware of the help they can receive.