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.
Another needed reform is making forgiven debt non-taxable: while the government forgives the balance of a loan after twenty-five years for those enrolled in IBR, the IRS treats forgiven principle as income and taxes borrowers for it. That means a borrower who couldn’t pay off a loan in twenty-five years may still end up owing tens of thousands of dollars to the IRS that they’re required to pay in full.
Letting all federal student loan borrowers cap their payments at 10 percent of their income would be the simplest way of protecting student borrowers in uncertain economy. That’s what Obama proposed in his 2014 budget through an expansion of the government’s Pay As You Earn program.
Lower barriers to refinancing. While helping homeowners refinance into lower-interest loans was key to turning around the housing market, so far student debt holders don’t have many options to modify their loans besides consolidation, usually only a one-time option.
Last month Senator Kirsten Gillibrand introduced a bill directing the Department of Education to refinance consolidated federal student loans with interest rates above 4 percent to a rate fixed at that threshold. According to the Center for American Progress, the proposal would save borrowers $14.5 billion.
Senator Sherrod Brown introduced a bill this week to help students with high-interest private loans to refinance their debt. About 15 percent of the nearly $1.2 trillion debt burden is held by private companies, which often don’t offer the same repayment options as the government. Brown’s bill directs the Treasury to find sources of capital to fund refinancing. The approach is similar to what the Federal Reserve did to prop up markets during the financial collapse, and it wouldn’t cost taxpayers a dime.
Reign in abusive collection practices. Once a student borrower is in default, “it’s very, very difficult to get back in current repayment status again,” Loonin said. A recent investigation found that borrowers are being preyed on by a growing debt relief industry, and the government itself can go as far as garnishing the Social Security checks of octogenarians who can’t pay back their loans.
Eliminating the use of the third-party collection agencies that often oversee government repayment programs would be a big win for distressed borrowers. “They can hammer people to try to collect, because that’s what their business is, but they’re actually being asked to help people resolve their debt problems as well and that’s not working,” said Loonin.
Want to learn more about what’s happening in Congress that the mainstream media refuses to cover? George Zornick writes about an administration nominee you probably haven’t hear of and what is at stake for struggling homeowners.