WASHINGTON—If Congress does not act concerning the interest rate of subsidized student loans, called Stafford loans, the interest rate will double from 3.4 percent to 6.8 percent on July 1.
Borrowers have accumulated nearly $1 trillion in private and federal student loan debt according to a 2012 Federal Reserve Bank report. Of that amount, $8 billion is non-federal loans, according to a congressional report.
A debate is underway over whether student debt can be compared to the mortgage lending abuses that preceded the 2008 crash.
U.S. lawmakers recognize the crushing burden that student loan debt can be. A recent congressional report asserts that the rising cost of higher education and increasing debt burdens for students pose a potential risk to college graduates and the broader economy.
Borrowers who become unable to pay back private student loan debt may soon be able to discharge their student loan debt in bankruptcy, if Congress passes H.R. 532, the Private Student Loan Bankruptcy Fairness Act. The resolution and private student loan lending practices was discussed in a judiciary committee hearing in Congress on June 17.
Bill sponsor Rep. Steve Cohen (D-Tn.) attended the committee hearing along with Rep. Danny Hayes (D-Il.) and David Hawkins, director of public policy research at the National Association of College Admissions Counselors.
“You want to make it that the people that make the irresponsible lending hold the bag, not the taxpayers,” said Sandy Baum, senior fellow at George Washington University Graduate School of Education and Human Development. “ If the loans were dischargeable, then lenders would be more careful in their lending practices.”
Baum addressed a number of issues that she stated affect what some deem a crisis of private student loan borrowing, including predatory and irresponsible lending practices where students sign loan promissory notes with unfavorable terms without realizing it.
Yet borrowing for education can be a good thing. “Students sign the paperwork thinking it will bring them a bright future and in many cases it does,” said Daniel Press, director of the National Association of Consumer Bankruptcy Attorneys.
But in some cases it does not. Karen Jensen, an American University alumna, is one of the fortunate individuals who had no student loan debt after her 2011 graduation, because of her father’s financial assistance. However, she said that she has a friend who is considering selling her eggs to pay student loans. Another of her friends, she said, works three jobs yet is unable to make ends meet and has to live at home.
The student loan debt horror stories abound and reports indicate that the difficultly that borrowers face in repaying student loans is a result of a trend in higher education costs, increased indebtedness and an asymmetry between the cost of education and the income that students earn post graduation.
Reinstating the option to discharge student loan debt in bankruptcy, a reversal of a 2005 law, is one solution that may aid former students.
Democratic lawmakers of the Joint Economic Committee cite other actions that lawmakers can take to lessen the impact of increasing student loan debt on borrowers including: converting private loans to federal loans to take advantage of federal borrower protections and keeping the interest rates on subsidized Stafford loans at the current level.