It’s a student loan reform bonanza! Well, sort of. But with the recently-filed Student Loan Fairness Act and the Earnings Contingent Education Loan Act, we have ideas for reform coming from both parties, and that’s great to see.
The latest round of reform proposals are related to federal student loan interest rates, which are set to double this summer from 3.4% for federal Stafford loans to 6.8%, unless Congress acts. If nothing is done, the cost of borrowing will increase substantially for many new borrowers. We have three new major bills designed to address this issue:
- Senator Elizabeth Warren (D-MA) has introduced the Bank on Student Loan Fairness Act. The bill’s purpose is fairly straightforward: it would reduce student loan interest rates to 0.75%, which is the interest rate that the Federal Reserve offers in loans to big banks. This is substantially less than the current 3.4% interest rate for federal Stafford loans and the 6.8% interest rate that will become the new normal if Congress doesn’t act. Senator Warren argues that it is unfair for the government to provide big banks with such low interest rates while charging substantially higher rates to students. Read the bill’s language here.
- Senator Kirsten Gillibrand (D-NY) has also introduced a bill to address student loan interest rates. Her bill would impact student borrowers who are already in repayment. It would allow borrowers to refinance their existing federal student loans so they can obtain a lower interest rate. Right now, many borrowers have federal student loans with interest rates at 6.0% or higher (some as high as 8.5%). Senator Gillibrand’s bill would allow these borrowers to refinance their federal loans at a fixed 4.0% rate. 90% of outstanding federal student loans could be eligible, and 37 million borrowers could benefit from this. To read more about the bill, click here.
- The Republican-controlled House of Representatives passed the Smarter Solutions for Students Act last week. This bill would base federal student loan interest rates on market forces, tying it in part to U.S. Treasury notes. Interest rates would be capped at 8.5%. Republicans argue that this would help students by removing student loan interest rates from Congressional meddling, but President Obama has promised to veto the bill because the variable interest rates would result in a lot of uncertainty for borrowers, and nonpartisan analysis indicates that the plan would not necessarily save students money in the long run. To read more about this, click here.
It is unlikely that any of these bills will pass in today’s gridlocked Washington climate. But as I’ve said before, it is very noteworthy that we’re starting to see student loan reform proposals from both parties. It means that our leaders are realizing that student debt is a major problem in this country, and something needs to be done.