For the past few months, the student loan policy debate has centered almost exclusively on interest rates. That debate should be over, at least for now. President Obama signed a law today that makes a number of important changes to interest rates for new federal student loan borrowers. The bill ties federal student loan rates to the financial markets. That means that rates will be lower….for now, but could certainly increase as interest rates increase.
The interest rate issue is important, but hardly the only concern for student loan borrowers. In fact, the new law only lowers rates going forward, doing nothing for existing borrowers. As the CFPB recently asked, What about the trillion dollars of debt that’s already been borrowed? It’s even more than one trillion, now approaching $1.2 trillion according to the CFPB. This astronomical figure is higher than ever. In fact, there was 20% growth in student loan debt from the end of 2011 to May 2013, much faster than the growth for other credit products.
We need to know more about which borrowers are struggling the most and why. The CFPB is moving this discussion along by digging deeper into existing data. The agency found that there are over 7 million borrowers in default on a federal or private student loan. Interestingly, the average balance of borrowers in default on federal Direct loans ($14,500) is less than the average balance of borrowers in repayment, deferment, or forbearance. As we generally see with our low-income clients, this shows that many borrowers go into default even with relatively low balances. In many cases, the amount borrowed is quite low, but the balances grow over time due to accrued interest and fees.
With the right kind of help, many of these borrowers can get out of default, go back to school in many cases, and get back into repayment. Getting out of default, however, can be tricky, particularly when collection agency staff give out inaccurate and often self-serving information about options. A growing number of borrowers are also paying “debt relief companies” for help even though they can get this help for free. There are good options for many borrowers in default. The key is to get the information out about these options and make sure that the programs are administered efficiently and fairly. We recently issued a brief with recommendations to help borrowers get a fresh start and move on from debilitating student loan debt. We urge you to send us your ideas as well. The interest rate bill should be the start, not the end, of the conversation about how to help struggling student loan borrowers.