THIS BILL DID NOT PASS–This page is for informational purposes about what has been happening in the student loan ecosystem
Senator Elizabeth Warren recently put forth a bill named the Student Loan Fairness Act H.R 1330, with the intent of helping student loan borrowers in managing of their debt, and being so called “fair” for those who have earned it. The Student Loan Fairness Act was introduced on March 21st 2013, and since has 51 cosponsors. There are a few important benefits of the bill which can make a big impact in borrowers lives.
This new legislation has no expiration dated. As long as there is no further interference from the Senate, the House or the President, students and their loan co-signers will know what to expect when applying for a loan. This resolves the problem noted by Megan McClean of the National Association of Student Financial Aid Administrators, “The past couple of years we’ve been in these situations where students haven’t known up until the last minute what their interest rate was going to be, because we were waiting for Congress to act.” The Student Loan Forgiveness act proposes to tie interest rates to the federal reserve discount window rate. The discount window rate is the rate which banks are able to borrow from the federal reserve, which currently stands at .75%. Student Loan Borrowers are currently paying 9x higher than the banks are able to borrow for. These rates would apply to Federal Subsidized Stafford Loans.
10/10 Repayment Plan
The Student Loan Fairness act would offer borrowers the 10/10 loan repayment plan, which limits the payment on student loans to 10% of discretionary income. Though this is already currently offered with the Income Based Repayment, one of the big differences is that the proposed 10/10 repayment also offers a maximum capitalization of 10% of interest over the loan that was taken out. This means that your loan balance will never surpass your original balance plus 10%. This is a huge benefit of the program, where currently students are baffled on how they can be paying every-single-month yet their balance continues to rise rather than fall.
The 10/10 repayment plan also offers 120 months of forgiveness. In the current Direct Loan program, only public sector employees can qualify for loan forgiveness after 120 months. In the 10/10 repayment, anyone in that repayment would have their loan forgiven at the end of those 10 years as long as their loans were taken out prior to the date of enactment of this bill. If your loans are taken out after the enactment of the bill, then you would qualify for a maximum of $45,520 in loan forgiveness. The kicker? Under this bill, the balance forgiven would not be taxable as it is in the current loan forgiveness programs.
Convert Private Student Loans Into Federal
There is currently over $200 billion in outstanding private student loans, with borrowers struggling to find solutions to their financial hardships. Private lenders, in most cases, are not as willing to provide borrowers with options on the student loans as the federal government is. Loan forgiveness, income-based repayments, teacher principle reduction are not words which will come from your private lenders mouth. The Student Loan Fairness act tries to address another big problem which is that private borrowers are often trapped with no options available to them.
The Student Loan Fairness Act would allow borrowers a year in which they would be able to convert their private student loans into federal loans if they qualify. You would be eligible for this conversion if you were eligible for federal student loans at the time you took out your private loans, and also have a gross income less than your total educational debt. Once your loan is converted you would be able to enroll into any of the programs available to federal borrowers. Even if you do not qualify for the conversion, the mere fact that this option exists will force private lenders to work with their borrowers and offer programs to parallel what is offered in federal programs knowing the private lending market could lose $100b in loans in a very short time.
Enhanced Public Service Loan Forgiveness
In the current Public Service Loan Forgiveness program, borrowers may be eligible for loan forgiveness after 120 payments in the direct loan program under qualifying repayment options. The Student Loan Fairness Act takes this one step further and would offer forgiveness to public sector employees after only 60 months. This five-year forgiveness may drive many college graduates to work their first five years out of college in the public sector to simply take advantage of the loan forgiveness, and then pursue whatever profession they want after this. The 60 month public service loan forgiveness plan would make the exorbitant fees of college less daunting knowing that you could simply sacrifice a few years of your desired profession to work in the public sector for a clean slate.
So Whats The Catch?
In as quickly as two years from this academic term, students and their families may be paying more for their college tuition. With the prospect of such small payments on your student loans, regardless of balance, and forgiveness aspects that will be extremely enticing, borrowers will be more apt to taking out these loans without thinking of the consequences. The result of this will be colleges and universities across the U.S raising their tuition costs, with the burden falling on the tax payer when the loan holder is forgiven of their balance. Some student advocates worry that rises in income will not keep up with rises in tuition.
It is this constantly rising tuition, along with over borrowing by so many students and a looming student debt crisis that has to be addressed. As Robert Weinerman of College Coach put it, “Students borrow because the loan is there. The interest rate isn’t a factor in their decision to borrow, their eligibility is.”
Right now, there is $1.2 Trillion in student debt. That is larger than even credit card debt for everyone in the U.S. This huge debt is beginning to have a chilling effect for many households. Large purchases such as homes and new cars are being put off in order to cover student loan payments. This does mean minor up ticks in sales of used automobiles, auto repair and restoration, home renovation projects, etc. but these are not what drive robust economic growth.
Recent reports released from the Federal Reserve and the Treasury Department have even made mention of it and some private organizations are comparing this to the housing crisis that was ignored until the bubble finally burst in 2008. While it is not necessarily accurate to compare the Student Loan Fairness Act to Fannie Mae or Freddie Mac policies, it has been the willingness of both parties in the past to put political concerns ahead of sound financial policy that raise concern with many people in and out of the government.
If you want to support the Student Loan Fairness Act, you can get behind it by signing this petition which currently has over 200,000 signatures. We also urge you to write to your representative and senators