If Congress wants to address the trillion-dollar student debt overhang that’s stunting America’s economic growth, it must get more ambitious about reforming rules about refinancing student loans and overhaul the systems borrowers use to manage and repay their loans, according to a new report from the Center for American Progress (CAP).
The report, “Resetting the Trillion-Dollar Student-Loan Debt Problem,” argues that Senate proposals for reducing interest rates and getting the government more involved in expensive private loans are a good start but recommends that reformers go further in three different ways. First, Congress should create a public-private partnership around student debt refinancing whereby private lenders could adjust rates on outstanding debt downward, making borrowers more likely to avoid default. If the loans default anyway, the private lender could recoup its losses from the government.
Second, the report argues Congress should stop waiting for borrowers to find existing programs that lower repayment costs and instead begin automatically enrolling students in things like Income-Based Repayment and Pay As You Earn, a pair of programs that help graduates avoid default during tough economic times or extended unemployment. Automatic enrollment in such programs, or moving loan repayment into the tax withholding system like Social Security, would significantly reduce the cost of servicing the loans, which makes it easier to lower rates.
And lastly, Congress should create a single information portal for all student borrowing “that is easy for student-loan borrowers to navigate.” Clarity for borrowers is key to changing the status quo, and a one-stop information shop would mean that “each student-loan borrower could be provided with information about the range of consolidation and refinancing options available.” Various members of Congress have recognized the need for student loan reforms, including Sen. Elizabeth Warren (D-MA) who laid out a radical revision to student loans that would drop interest rates down below 1 percent in the spring. Three other, milder pieces of legislation on offer in the Senate don’t go far enough, according to the CAP report. Sens. Jack Reed (D-RI), Richard Durbin (D-IL), and John Tierney (D-MA) have proposed to make student loan rates more flexible. Sen. Kirsten Gillibrand (D-NY) has proposed to allow students to refinance all their outstanding loans, including private ones, at a maximum rate of 4 percent (far below most current rates). Sen. Sherrod Brown’s (D-OH) bill would empower the Treasury Department to buy up privately-issued loans, which tend to have higher interest rates and worse default rates, and reduce rates on outstanding private student loan debt for many.
Action is needed, given the scope of the problem and the speed with which it has emerged. Student borrowing costs for a single year of higher education jumped by 44 percent from 2004 to 2012. A total of 6.5 million Americans — about one in eight who borrowed for their educations — are in default on their loans. Programs designed to help struggling graduates avoid default by hitching their repayment terms to their employment status and income are vastly under-enrolled compared to how many people could be helped by them.
Meanwhile, student debt keeps people from other major purchases like houses and cars, which in turn hurts overall economic growth. Borrowers who manage not to default could buy 155,000 new homes or nearly 67 million iPhones with the money they spend paying back their loans each year, by one calculation.