A new proposal in Congress to tackle America’s $986 billion in outstanding student loan debt seeks to refinance high interest rate loans and save debtors millions in interest payments.
Sen. Kirsten Gillibrand, D-N.Y., last week introduced the Federal Student Loan Refinancing Act. It would force the Secretary of Education to automatically refinance federally financed student loans that carry interest rates higher than 4 percent, down to a fixed, 4-percent loan. According to the Education Department’s own budget documents, about 75 percent of all federal student loans now carry interest rates of either 6.8 percent or 7.9 percent.
This year’s graduating class owes an average of $30,000, according to a recent analysis of government data. If Gillibrand’s bill is passed by Congress, it would affect nearly 90 percent of all outstanding student loans, saving nearly 37 million borrowers $14.5 billion in interest payments in the first year alone.
Student Loan Interest Set to Double
Gillibrand’s plan is the latest in a trail of bills being rolled out of Congress as the July 1 deadline nears to double the interest rate on the popular Stafford Student Loan program from 3.4 percent to 6.8 percent.
These bills are also coming on the heels of a recent Congressional Budget Office report that shows the U.S. Department of Education stands to make $51 billion this year off its student loan programs.
Two weeks ago, Sen. Elizabeth Warren, D-Mass., introduced the Bank on Students Loan Fairness Act, legislation that would reduce the interest rate on all new student loans to a mere 0.75 percent — the same rate that the country’s biggest banks are charged when they borrow money from the Federal Reserve.
The House of Representatives offered several bills this session to help reduce the burden on student borrowers. The Student Loan Fairness Act of 2013 would require borrowers to pay 10 percent of their discretionary income on their debts for 10 years, after which the remaining amounts owed would be forgiven. That bill, introduced by Rep. Karen Bass, D-Calif., would also permanently cap interest rates at 3.4 percent.
The Student Loan Relief Act, introduced by Rep. Joe Courtney, D-Conn., would extend the 3.4 percent interest rate on Stafford loans for another two years. The bill has 95 co-sponsors in the House of Representatives.
Democrats also proposed the Responsible Student Loan Solutions Act. That bill is co-sponsored by Courtney and fellow Rep. John Tierney, D-Mass., as well as Sens. Jack Reed, D-R.I. and Dick Durbin, D-Ill. It would offer adjustable-rate loans for students and parents, and a cap on the maximum interest rate. Its rates would be tied to the 91-day Treasury bill plus a percentage determined by the Secretary of Education.
House Republicans have introduced the Smarter Solutions for Students Act which aims to link student loan interest rates to a formula based on the 10-year Treasury note, plus 2.5 percent, thus taking Congress out of the loan calculation equation, altogether.
Student Debt Stalls Economic Growth
The push to reconfigure the government’s student loan program is a response to recent studies, most notably by the New York Federal Reserve Bank, suggesting that today’s record student loan debt is becoming a drag on the nation’s economy, holding down other types of borrowing for items like cars and houses.
Should Gillibrand’s bill become law, it would boost U.S. economic activity by an estimated $21.7 billion, according to the Center for American Progress, a policy and advocacy group.
Whether or not Congress can agree on any short or long-term changes to the status quo, is a question whose answer will affect tens of millions of student loan borrowers. And its deadline for action is only six weeks away.