Congress should allow students to refinance their loans
It seems that everyone—owners, companies, and even state and local Governments– take advantage of the current historically low interest rates to refinance its debt. Refinancing allows the borrower to replace their existing debt with a new loan with better terms. It’s a victory for individuals and for the nation as a whole, easing the burden of loan repayments and freeing up income for purchases that boost the economy. But one group is being left behind in the refinancing trend: students who take out loans to pay for college education.
These students are increasingly in difficulty. Student loan debt now stands at $ 1 trillion – of which $ 864 billion is backed by the federal government – and a growing percentage of borrowers are failing to repay their loans. More … than 13 percent of students whose loans matured in 2009 defaulted on this debt within three years due to long-term default. Another 26 percent of borrowers from five of the major loan guarantee agencies became in arrears on their loans, one stop just before default.
Ensuring students are able to make timely payments is in the nation’s best interest, and it’s time for federal policymakers to take action. Congress should adopt a program that allows alumni to refinance their existing student debt. This reform should include a significant reduction in interest rates and should allow private loan borrowers to consolidate their debt in the federal student loan program or otherwise change the terms of their loans.
Refinancing is a pragmatic solution to the problem of growing student debt in this country. Reducing the costs of student loans increases the likelihood of repayment while stimulating the economy by freeing up income that can be used and spent in other sectors of the economy. They will also build confidence in government among young Americans.
Students are frustrated that neither the colleges nor the government are holding back tuition hikes. They do just the opposite, in fact. State governments are divest regularly in public higher education. And rather than cut costs, colleges have responded by tuition increase, by placing the burden on families. Some students have even taken out private loans, which may bear interest. twice as high in the form of federal loans.
Groups like Campus Progress are tackling a new source of frustration for students: Interest rates on public debt are remarkably low—currently below 2 percent—However, interest rates on unsubsidized federal student loans have stagnated at 6.8 percent.
The future may bring policies that lower college costs and tighten government regulation of private lending. But these policies won’t help recent graduates who have already taken on too much debt to pay too high a tuition fee. Giving existing borrowers a break would be a gesture of good faith – a gesture that says policymakers recognize the unsustainable path that student debt is taking and are doing what they can to right the wrong.
The Center for American Progress and Campus Progress this month will release a proposal for a large-scale modification of existing student debt that will bring greater equity and protection to the student loan industry while reducing the burden of repayment. Congress would do well to take these political ideas into consideration and lend a hand to recent graduates who are starting their careers in this difficult economic climate.
Julie Margetta Morgan is Director of Post-Secondary Access and Success at the Center for American Progress. Tobin Van Ostern is Deputy Director of Campus Progress.