Friday, May 17, 2013

New Student Loan Bills in Committee - Watch Out!

On July 1, 2013, the interest rates on student loans is scheduled to double, from from the current 3.4% to 6.8%.  

The House Education and Workforce Committee, controlled by Republicans, passed HR 1911,out of committee to the floor,  the Smarter Solutions for Students Act (another link to the text here, and to a summary of the bill here; the Committee provides a factsheet here, and its press release here.) This bill ties the student debt interest rate to the federal reserve interest rate.

The Congressional Progressive Caucus, Representative Sinema appears to have introduced an alternative to this student loan bill, the Stability to Ensure the American Dream for Youth Act (STEADY), HR 1876.IH.  This bill simply extends the current interest rate until 2017.

The White House has made a proposal on the issue, in the annual budget. Obama's proposal would tie student loan interest rates to the 10-year Treasury note rate, but with a lower added percentage: 0.93 percent for federal student loans, 2.93 for unsubsidized loans and 3.93 for PLUS loans. (You can't see that level of detail in the Whitehouse press release here,  Here is a link to the entire budget; here is the Washington Post analysis).

There is a bill from Senator Elizabeth Warren chugging along in the Senate, S897.IS.  Her interest rate would be the same as that offered to banks by the Federal Reserve.  She just introduced it May 8.  According to the little news item, Warren's bill is gathering support. The bill is titled the Bank on Students Loan Fairness Act, and is, like the House bill, designed to avoid the looming jump in student loan interest rates.  Note that Warren's bill does not address private loans.

And there is a stop-gap measure in the Senate, jointly sponsored by Senators Jack Reed, Tom Harkin and Harry Reid, S. 953. Titled The Reed-Harkin Student Loan Affordability Act, the bill freezes the interest rate at 3.4%, and pays for the expense by closing several tax loopholes.  See the press release for a nice summary.  Sadly, though, the bill cannot possibly make its way through the legislative process before July 1.  

While everybody seems to agree that the jump is a bad thing, there is a great gulf in how the two parties want to address the problem. The Republican solution, in the Smarter Solutions for Students Act, is to tie the interest rate to the Federal Reserve interest rate. That seems pretty benign right now, when rates are at historic lows. But that won't last for very long. And it appears these days that student loans may last longer than either marriages or mortgages!

Warren's solution cuts the student loan interest rates, and at the same time, tackles the problems of the entire student loan lending apparatus.  This comes at a time when the large banks that have been major lenders in the privatized student loan arrangements are beginning to complain about default rates. Interestingly, a coalition of big banks are seeking agreement from the regulators to extend the time for borrowers to repay some loans before the lender is required to write it off.  Currently, banks that extend time to borrowers may have the debt classified by regulators as a "troubled debt."  Such a designation then triggers requirements that the bank maintain more of their assets on hand, rather than investing them in income-earning projects.

However, from the debtor's point of view, forbearance is not a completely positive benefit.  While they may be allowed to defer payments at the time, when they don't have a job, or don't earn enough to make the payments, they will be required to pay the total owed amount in the future. And interest owed continues to mount. This means that the total cost of the loan continues to rise for the debtor who is offered forbearance!  

Here is an interesting map from CNN showing which states have the most student loans delinquent by 90 days or more.  It's an interesting map, and something to think about.  Keep in mind that student loans are the one kind of debt that are not usually allowed to be discharged in bankruptcy. Student loans that are delinquent are treated very differently than other debts. Here is a nice short article from Time about how student debt is treated, and how that has changed over time.

If Congress does not address this trap they have created for students and their families, it will be a shame on our country.  Lives are being ruined. Rather than creating upward mobility, college and higher education is trapping whole families into debt.

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