Student Loan Fixes Could Go Beyond Interest Rates

The doubling of interest rates is in the spotlight, but there’s more to federal student loan reform.

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According to at least one estimate, the class of 2013 will be the most indebted ever.

Lawmakers in Congress remain all heated up about the July 1 doubling of federal direct subsidized loan interest rates with, as Politico reports, members of both parties using the now outdated #DontDoubleMyRate hashtag on Twitter. (The Student Loan Ranger is trying to get some traction for the more accurate #UndoubleMyRate.)

With both parties ardently seeking a solution with a few weeks to go before students return to school and start taking out loans, we remain convinced a fix that will be retroactive to July 1 is in the offing. The only question is whether it will be a one- to two-year extension of the 3.4 percent rate or a longer-term fix based on market rates.

The first problem with this is that the doubling of subsidized direct loan interest rates is not the biggest problem faced by students. The second is that, in the Student Loan Ranger's opinion, Congress is ignoring the plight of borrowers.

[Learn what the student loan rate hike means for students.]

For students, the doubling of interest rates from 3.4 to 6.8 percent sounds scary, and it is certainly downright irritating at a time when the government is profiting off student loans because of low current interest rates. But barely under half of undergraduate borrowers receive subsidized loans – eligibility is based on financial need – and graduate students are no longer eligible for subsidized loans.

And, as Inside Higher Ed reports, even students who receive the maximum of $23,000 in subsidized loans will only pay about $4,000 more in interest – $33.33 per month – over a standard 10-year repayment plan. The average student borrows around $9,000 in subsidized loans and will only pay about $1,500 more.

Instead, it's the rapidly rising cost of college that is the big problem. According to at least one estimate, the class of 2013 will be the most indebted ever, with an average debt load of about $30,000 for a bachelor's degree.

If Congress really wants to help students, it will quickly dispose of the relatively easy legislative problem of interest rates doubling and get to work on the far harder problem of containing college costs and providing more grant aid – particularly Pell Grants – to lower the debt burden for current and future students.

[Find benefits and drawbacks of student loan repayment proposals.]

Unfortunately, those fixes won't help the graduates currently burdened by approximately $1.1 trillion dollars in student debt. As we've reported, this burden is widespread, affecting service members to parents to retirees, disproportionately affects women and minorities and may even be prolonging the recession. Here are three actions Congress could take toward student loan reform.

First, Congress should pass the Student Loan Fairness Act, which has already garnered 51 co-sponsors in the House but which, according to GovTrack, has only a 1 percent chance of getting past committee.

The legislation provides limited prospective forgiveness to encourage responsibility on the part of borrowers, but full retroactive forgiveness for borrowers who have been struggling to repay their loans for 10 years or more.

[Explore the debate over federal student loan interest rates.]

Second, Congress could reinstate bankruptcy protections for both private and federal student loans. Student loans – especially private student loans – should be treated the same as other forms of consumer debt. In fact, not doing so simply encourages irresponsible lending.

Third, as the Consumer Financial Protection Bureau recommended in a recent report, Congress should work on ways to spur private student loan refinancing. Private student loans are particularly pernicious for borrowers having trouble paying back their loans because they lack the protections of federal student loans. And, even as borrowers refinance mortgages and other forms of consumer debt, private student loan borrowers remain locked into interest rates far above the current market rate.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.