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From Banking and Finance Law Daily, May 10, 2013

Movement to Tackle Student Loan Debt Continues with Legislation to Make Loans Affordable

By Katalina M. Bianco, J.D.

Lawmakers have introduced legislation intended to address the rising rate of student loan debt and the domino effects of this debt, not only on students but on the broader economy.

Responsible Student Loan Solutions Act. Sens. Jack Reed (D-RI) and Dick Durbin (D-Ill) introduced the Responsible Student Loan Solutions Act (S. 909). According to Reed, student debt has crested above $1 trillion for the first time in the nation’s history, passing credit cards and auto loans to become the second-largest type of consumer debt behind mortgages. The bill would set interest rates based on the actual costs of operating student loan programs. The bill would offer a long-term approach to setting student loan interest rates and would help strengthen the economy, protect taxpayers, and ease the burden of student debt on families, Reed said in a release issued by his office.

The legislation would offer adjustable rate loans with a cap on the maximum interest rate that could be charged to protect borrowers during periods of high interest rates. Interest rates for need-based, subsidized loans would be capped at 6.8 percent, and rates for unsubsidized and parent loans would be capped at 8.25 percent. A revenue-neutral annual rate would be set based on the 91-day Treasury bill, plus a percentage determined by the Secretary of Education to cover program administration and borrower benefits. The bill also would correct an inequity for undergraduate students who qualify for subsidized loans and allow borrowers who are stuck with high fixed-rate federal student loans to refinance.

“Higher education is not a luxury: it is part of the American dream that every hard working and responsible student should be able to afford,” said Durbin. “When interest rates double at the end of June, the cost of going to college will go up for more than three hundred thousand borrowers in my home state of Illinois. While we have been dealing with the mortgage crisis over the last few years, Congress has all but ignored the millions of young adults who are signing away their income for decades just to get an education,” he said.

Student Right to Know Before You Go Act. The Student Right to Know Before You Go Act is intended to ensure that a wide range of comparative data about higher education programs is more readily available for prospective students and their families. The legislation, introduced by Sens. Mark R. Warner (D-Va), Ron Wyden (D-Ore), and Marco Rubio (R-Fla), would streamline existing institutional reporting requirements to give students and their families more tools to easily compare graduation rates, student loan debt, employment prospects, and potential future earnings as they make decisions about higher education. Similar bipartisan legislation was introduced in the House by Reps. Duncan D. Hunter (R-Calif) and Robert Andrews (D-NJ)

“There’s been a needed focus on access to higher education, but it’s time to bring value into the equation,” Sen. Wyden said in a release issued by Warner’s office. “Instead of forcing students to make blind decisions on such a huge investment, this bill would empower them with a wide range of information about what their choices will mean in the working world.”

The legislation would direct the Secretary of Education to make the information available online in an easily accessible format to provide students and their families with the opportunity and additional tools needed for a more complete picture of the value of their education.

Individual privacy would be strictly maintained with safeguards to ensure that no personally identifiable information could ever be disclosed, and the system would be audited for data quality, validity, and reliability. Using information that is already gathered, the bill would allow student records to be matched with employment and earnings data. The results would be highly accurate and informative, according to a summary of the legislation.

CFPB on Domino Effect. An editorial on “” by Consumer Financial Protection Bureau Student Loan Ombudsman Rohit Chopra warns that “there may be a domino effect on the broader economy if we ignore borrowers currently stuck with high student loan payments.” He says that “If student debt is holding back just a third of those 2 million young Americans from living on their own, that adds up to a $100 billion loss or delay in economic activity.”

According to Chopra, since the CFPB highlighted a year ago that student debt had surpassed the $1 trillion threshold, others have warned about the impact on the broader economy. In 2012, the Treasury Department’s Office of Financial Research described how student debt might impact demand for mortgage credit. The Federal Reserve Board’s Open Market Committee discussed whether student debt is impacting household spending. And recently, the Financial Stability Oversight Council discussion of student debt in its annual report “added to the chorus.”

In February 2013, the CFPB issued a request for information on student loan affordability. The CFPB received more than 28,000 submissions from experts and individuals responding to its request, and on May 8, 2013, it published a report based on the results of those submissions. According to the bureau, respondents indicated that high student debt levels might impact everything from homeownership to health care.

“While student debt may not pose the same sort of systemic risk to the financial system, it could be a drag on the recovery if borrowers can’t afford their payments,” Chopra cautioned.

Pledge of Action. In response to the CFPB’s report, Rep. George Miller (D-Calif), the senior Democrat on the Education and the Workforce Committee, and Rep. Maxine Waters (D-Calif), Ranking Member on the Financial Services Committee, released a joint statement commending the bureau for their continued research and analysis on the domino effect of student loan debt and pledging their support to the cause.

“This report increases the mounting evidence that student loan debt is a drag on economic growth and potentially a shackle for many borrowers who struggle with unmanageable monthly payments. We are committed to closely examining the report’s findings and look forward to working with the CFPB, stakeholders and colleagues in Congress to ensure that students who are saddled by unmanageable private education loans have a clear path to financial stability,” the representatives said.

MainStory: TopStory: CFPB Loans

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