| Do something about student loan debt | | |
|
The Project on Student Debt, along with a host of supporters (including, surprisingly, major players in the student loan industry) has come up with five reforms that can be enacted without interference, I mean involvement, from Congress. That's because the Department of Education already has the power to make changes in existing rules that aren't working well.
Below are the five reforms proposed by the Project
on Student Debt, which focus mostly on two themes: economic hardship
deferment and income-contingent repayment options. Its main concern
is that the prospect of looming debt might discourage students in
low-income families from pursuing a college education altogether,
and many students will forgo low-paying public service jobs that
nevertheless require a college education. If young folks do incur
debt to get that education, they should have some protections.
 |
Proposed reforms: |
|
|
|
|
The way things are now
Currently, too few graduates qualify for economic hardship deferment
-- only those with Perkins loans and subsidized Stafford loans,
and only those who meet somewhat arbitrary and inconsistent income-eligibility
rules, which don't take family size into account. These borrowers
also have to navigate a complex application process, and any deferment
is limited to three years. The reforms call for making the application
process less cumbersome, lengthening the relief period and taking
family size into account when determining hardship benefits.
Current rules also allow for income-contingent repayment
options for those whose incomes are low, relative to outstanding
debt. The way things stand now, borrowers who are earning wages
that fall below the poverty level only have to make token payments,
and family size is taken into account. Required loan payments are
capped at 20 percent of earnings above the poverty level. While
the borrower doesn't get interest relief, the loan is forgiven after
25 years of payments. This form of relief is only available to students
with loans from the Federal Direct Student Loan program and not
to those with loans from the Federal Family Education Loan, or FFEL,
program. This is a quirk of fate determined by schools.
The proposed reform would allow more wiggle room with
respect to the poverty line, allowing the minimum earnings threshold
to be 150 percent of the poverty level (which is set at $9,800 in
2006 for individuals) before any income is used toward paying debt.
Then it would cap required loan payments at 15 percent of earnings
above that level. And it would forgive loans after 20 years of hardship
payments rather than 25 and make this option available to students
with loans from either the FDSL or FFEL programs.
These ideas were not formed in a vacuum. In a report
titled "How
much debt is too much?" the College Board notes that other
countries have implemented income-contingent repayment systems that
are more lenient than that of the U.S., including Australia (since
1989) and New Zealand (since 1992). England is implementing such
a program beginning this year. "In all three systems ... if
post-schooling income is less than a threshold amount, no payments
need be made," according to the report.
In that report, the College Board examines the basis for current student loan payments. It observes that the lending industry doesn't look at such things as the manageability of servicing a huge debt. It focuses on default rates and makes lending decisions based on statistical probabilities. A student's debt burden "may be perceived as unmanageable long before default is unavoidable," notes the report.
Let's do our part to ease the pressure felt by young
folks with big student loan debts hanging over their heads. After
all, they need some money so they can start saving early for retirement!
Longtime financial journalist Barbara Mlotek Whelehan
earned a certificate of specialization in financial planning. If
you have a college-loan experience or observation that you'd like
to share, write to Boomer
Bucks.
| 
