Student borrowers and the economy
The New York Times said the following in two editorials:
President Barack Obama took an important step this week when he signed an executive order Monday providing relief to millions of struggling student loan borrowers and urged Congress to pass a student loan refinancing bill that is scheduled for a vote in the Senate Wednesday. Both the executive order and the refinancing bill speak to a grave problemthat has trapped recent college graduates and threatens the long-term health of the economy.
This problem has its roots in the financial crisis, which destroyed trillions of dollars in household savings and home equity that families might otherwise have used to pay for college. (Even before the recession, state colleges, which educate about 70 percent of the nationís students, reacted to state budget cuts by raising tuition.) With no other choice, students and their families financed college by relying more heavily on student loans.
According to the federal Consumer Financial Protection Bureau, student debt has doubled since 2007 and now stands at about $1.2 trillion. Stagnant wages and a tough job market have made it difficult for borrowers to repay these debts. According to federal statistics, for example, about 7 million of the nationís 40 million student loan borrowers are in default.
The people in this large and growing pariah class have difficulty getting jobs or credit, or renting apartments. But borrowers who narrowly earn enough to make loan payments are not much better off; they have to put off car purchases and bunk with their parents because they canít afford rent, and they canít even begin to think about saving for retirement.
As an official from the Consumer Financial Protection Bureau told a Senate hearing earlier this month, student debt is having a kind of ďdomino effect,Ē damaging other areas of the economy. And unless federal policymakers intervene in a muscular way, this generation of student borrowers could become a long-term drag on the economy.
The executive order Obama signed Monday will help up to 5 million student loan borrowers. It will expand access to the federal governmentís Pay as You Earn program, which allows borrowers to arrange affordable payments and qualify for loan forgiveness. It requires the Department of Education to evaluate more stringently how well companies that collect federal loans keep borrowers out of default.
Most significantly, it requires the department to help people who have defaulted rehabilitate their records through a program allowing lower payments.
Homeowners, businesses and individuals can take advantage of low interest rates to refinance their debts. Student borrowers, however, have few such options. The Senate bill, known as the Bank on Students Emergency Loan Refinancing Act, would create a fund ó paid for by a new minimum tax on millionaires and billionaires ó that would be used to help people with federal or private student loans refinance those loans at lower interest rates.
The bill might pass the Senate, but House Republicans will oppose any such tax. Still, by bringing the matter to a vote, Senate Democrats underscore the need to do something about dire indebtedness among recent graduates, and also give members of their party a potent issue on which to run in the midterm elections. Even if the refinancing bill were to become law, it would represent only part of the solution.
To get a handle on this problem, Congress needs to reconfigure the student aid system to prevent the most vulnerable student borrowers from falling too deeply into debt in the first place.