First, the bad news. Congress failed to pass a bill to stop interest rates on new federal Stafford loans from doubling. The deadline was July 1. Luckily, most of you won’t be impacted by this. Still, it’s disappointing, to say the least, as Congressional dysfunction and hyper-partisanship continue to rule our federal government.
However, there is also some encouraging news. As I’ve been blogging about recently, there have been a ton of new student loan reform proposals introduced into Congress. Some of them offerbroad, comprehensive reform of the entire system. Others are more targeted towards a particular problem, mostly the interest rate issue. They are coming from both political parties, which I think is great.
The latest reform bill comes from Ohio senator Sherrod Brown, and addresses private student loans. Of the $1 trillion dollars in total student loan debt in the United States, over $150 billion of it is private student loan debt. Private loans are terrible because they typically have inflexible terms and higher interest rates than federal loans, often even higher than the just-doubled interest rates of new federal Stafford loans. In fact, average private loan interest rates are 8-10%, which is, in a word, insane. They also have none of the benefits of federal student loans, such asIncome-Based Repayment, consolidation, and loan forgiveness. The Consumer Financial Protection Bureau recently found that private student loans are holding back the economic recovery.
Senator Brown’s bill, called the “Refinancing Education Funding to Invest for the Future Act,” grants the U.S. Treasury the authority to create a government-backed financing vehicle that would allow borrowers to refinance high-interest private student loans into new loans with much lower interest rates and more flexible terms.
This could be a huge benefit to borrowers. A private student loan with a balance of $20,000 and an interest rate of 10% can accumulate almost $7,000 in interest over three years. The borrower would have to make monthly payments of nearly $200.00 just to keep the balance at $20,000 (the balance would not even decrease). However, if that same loan had an interest rate of 3%, only about $2,000 of interest would accumulate over the same three-year time period. The borrower’s monthly payments of $200.00 would not only pay off this interest, but would reduce the principal balance to under $15,000 after three years. So this could be a huge help to borrowers with high-rate private student loans.
To read more about this bill, click here.