An International Final Four: Which Country Handles Student Debt Best?

From today’s New York Times:

Although an American college degree remains a good investment on average — the higher earnings for most graduates justify the cost— millions of borrowers are in default on their loans.

Policy analysts generally agree on a need for reform, but not on which path policymakers should take. Can America learn anything from other nations? We gathered experts with a range of perspectives, from America and abroad, and asked them to compare the systems in Australia, Britain, Sweden and the United States.

We chose this grouping of nations because they highlight important differences both in loan repayment systems and in related policies such as tuition and loan limits, not necessarily because they all belong among the best systems in the world. In the spirit of March Madness, we devised a bracket-style tournament, seeding the countries so that those with more similar systems would meet in the semifinals.

Sweden vs. United States

Sweden and the United States differ in whether the monthly loan payment remains the same over time and in the number of years borrowers can repay their loans.

The average American borrower with a bachelor’s degree leaves college with $28,400 in debt. Students can borrow for both tuition and living expenses, although loan limits make it hard for an undergraduate to borrow more than $45,000 over four years.

In Sweden, average debt levels are similar — the equivalent of around $21,000 — even though students borrow only for living expenses (Swedish universities do not charge tuition). Interest rates are also very low; the rate for 2018 is now 0.13.

In the United States, borrowers are required to begin making payments six months after leaving college. By default, payments are set so the whole principal and interest, which is tied to the market rate at the time the loan is made (currently 4.45 percent), will be paid off in equal monthly installments paid over 10 years.

American borrowers can opt into alternative repayment plans, including plans that tie payments to income or that start lower and increase over time. Income-based plans offer forgiveness of any remaining balance after 10 to 25 years, but enrolling in these plans requires making a request to the servicer and filing paperwork annually. If you miss the paperwork, you are put back into a 10-year repayment schedule, but can ask to re-enroll. There are a large number of plans that are hard for borrowers to navigate, especially in times of financial stress.

Swedish borrowers, on the other hand, pay off their loans over a much longer period. Borrowers can be in repayment for up to 25 years, with the typical borrower paying for 22 years.

Read the complete article here.

CA considers legislation for students to refinance loans with lower interest rates

From today’s LA Times:

State treasurer and gubernatorial hopeful John Chiang is wading into the increasingly high-profile debate over college affordability with a new push for California to play a role in alleviating the burden of high-interest private student loans.

Chiang is sponsoring legislation that would create a $25-million fund that would offer a degree of protection to student loan providers. With the state assuming some of the risk, the measure’s proponents say financial institutions will be more likely to offer lower interest rates to those carrying student debt.

“We know that unfortunately too many Californians, too many Americans, are saddled with extraordinary debt,” Chiang said in an interview, touting his plan as an effort to “try to get them out of debt as quickly as possible.”

The proposal, which is being carried in the Legislature by Sen. Ben Allen (D-Santa Monica), is among a swell of measures introduced in the Legislature this year aimed at tackling the high cost of college. Allen and Chiang will unveil the legislation at a Capitol news conference Tuesday.

Read the complete story here.

Federal consumer protection agency announces reform agenda for 2014

From the New York Times by Tara Siegel Bernard:

The Consumer Financial Protection Bureau, which has already overcome considerable political resistance, has managed to pack some punches in the last few months on behalf of the purchasing public it represents.

In December, the agency ordered refunds by major companies for misleading business practices: American Express, more than $59 million; GE Capital Retail Bank, up to $34 million. A joint settlement with Ocwen Financial totaled about $2 billion. The list goes on.

And on Friday, new mortgage rules and consumer protections went into effect that were part of the financial overhaul bill that created the agency, which opened its doors just over two years ago.

Yes, there’s a new sheriff in town. But the true test of the consumer watchdog’s mettle will be in the year ahead, when the agency is set to take on several thorny issues that are likely to draw more resistance from the financial services lobby and give more impetus to Republican opponents in Congress who continue to try to reduce the bureau’s power. As recently as November, a House committee passed several bills to do just that.

(The agency’s new director, Richard Cordray, whose confirmation was being blocked by Republicans, was finally confirmed in July, two years after his appointment by President Obama.)

Consumer advocates say they will be watching several big issues closely, including something called forced arbitration, which amounts to waiving the right to sue in some kinds of cases, as well as debt collection and overdraft charges.

The consumer agency has already begun studying all of these areas, but how far it will go remains to be seen. Several consumer advocates, consumer law experts and others have weighed in on what they would like to see the agency accomplish in the year ahead on these issues and others: Arbitration, Overdraft Fees, Debt Collection, Student Loans, and Credit Report Disputes.

Click here to read the entire article.

Update: Congress passes Bipartisan Student Loan Certainty Act of 2013

In a fairly novel turnaround Congress passed a major piece of legislation Wednesday with significant bipartisan support that changes the way interest rates for student loans will be calculated. The Bipartisan Student Loan Certainty Act of 2013 was able to bridge a gap between Democrats and Republicans over the government’s role in regulating financial institutions. The bill passed by an overwhelming majority of 392 to 31.

The fate of the bill has long been in question as both Democrats and Republicans alike tried to find reasons for opposing it, ranging from concerns about protecting students from predatory loan practices among the former to worries about government interference in distorting interest rates.

All federally subsidized Stafford loans will have interest rates that are tied to 10-Year Treasury bonds plus 1.8 percent with a cap of 8.5 percent and 9.5 percent on undergraduate and graduate loan respectively. The federal loan program PLUS would pay the Treasury rate plus 4.5 percent. Roughly, this means individuals taking out new loans after the law passes will pay 3.61 percent for undergraduate loans and 5.21 percent for graduate loans.

Update: Senate reaches compromise on federal student loan interest rates

Senate negotiators reached a tentative deal this morning to address the student loan interest rate crisis. There now appears to be sufficient bipartisan support to pass legislation similar to a proposal by the Obama Administration that would tie interest rates on federally subsidized Stafford loans to 10-Year Treasury bonds plus 1.8 percent with a cap of 8.5 percent and 9.5 percent on undergraduate and graduate loan respectively. The federal loan program PLUS would pay the Treasury rate plus 4.5 percent. Roughly, this means individuals taking out new loans after the law passes will pay 3.61 percent for undergraduate loans and 5.21 percent for graduate loans.

Democratic leaders had been blocking a similar bill because of worries there was no caps on interest rates tied to federal loans that would protect students against sudden market spikes in interest rates. The measure was one President Obama insisted be part of legislation aimed at helping students. Sens. Joe Manchin (D-WV) and Angus King (I-ME) crafted the compromise after they voted against the Democratic bill for failing to address these worries, and with the support of Sen. Tom Carper (D-DE) garnished enough votes for the legislation to pass, pending a final analysis of the law’s deficit impact by the CBO.

Congressional politics stands in the way of looming student loan crisis

The coming student loan debt crisis has been widely discussed but it remains low on the list of problems facing Congress and the priorities of the American people. In fact, political leaders are trying to dodge a proverbial bullet on the issue. On July 1 the House and Senate voted to raise the interest rate on subsidized student loans from 3.4 to 6.8 percent, a move that economists say will hamper students’ efforts to repay loans in a jobless economic recovery and educators say will hurt low-income students trying to get an education.

Congress returns from its July break this week with egg on its face, and is franticly searching for a way to fix the problem retroactively. Although the recent vote to double interest rates affects only newly issued federally subsidized loans, according to the Congressional Budget Office this represents 25 percent of all such loans

The prevailing idea has been to extend the 3.4 interest rate for another year as a short-term fix while politicians struggle with the implications of contributing to a financial bubble that looms on the horizon. However, that plan is going nowhere in the Senate where 42 Democrats have signed onto legislation extending the rate for one year because it is part of a larger package that includes alleged tax increases. House Republicans are opposed to this temporary fix because it is rolled into a bill that contains “permanent tax increases,” which is nothing but the closure of a loophole for inherited retirement accounts. In short, they would rather appear in favor or raising interest rates on student loans so that the super-rich can continue to exploit a tax loophole, than search for a bipartisan solution.

Another plan that has recently been floated with the bipartisan support of six senators would reform the federal student loan system entirely, and perhaps depoliticize it, by pegging loans to 10-year Treasury notes with an additional 1.85 percent cap. The proposal from Sens. Joe Manchin (D-WV), Tom Carper (D-DE), Angus King (I-ME), Lamar Alexander (R-TN), Richard Burr (R-NC) and Tom Coburn (R-OK) also includes a key provision demanded by President Obama that is missing in the House bill:  namely, locking in interest rates for the life of the loan so that sudden rate increases rates would not lead to crippling payments for workers later in life. However, a weakness of the plan is higher rates for graduate student loans, raising the question whether it will act as a disincentive for students and workers seeking graduate degrees to improve their skills.

Yet, the problem goes much deeper than the Congressional vote to double interest rates and the political backlash it has created among educators and young voters. Paul Combe, president of American Student Assistance, claims that Washington is, in part, missing the point. The looming bubble concerns loans that are already in repayment but workers are suffering from a deficit of good paying jobs in a struggling economy. Student loan payments are further undercutting effective demand as workers see larger portions of their income going to repayment instead of consumption.

“If we have somebody who gets into income-based repayment after they leave school, the interest rate isn’t that big of a deal. It’s how they get that monthly payment,” Combe said.