Student loans affect you – whether you have them or not. Approximately 40 million Americans have student loans, which accounts for $1.2 trillion in outstanding debt. That's more than the total amount of credit card debt in this country. Quick back of the envelope calculations tell me that this is an issue that directly affects around 13 percent of Americans. The Pew Research Center, in an only slightly more official estimation, says nearly 1 in 5 American households are affected.
The effects of student loan debt, however, aren't just limited to direct effects. Indeed, the indirect effects at play are just as important because student loan debt impacts the entire American economy. According to a recent report from the Consumer Financial Protection Bureau (CFPB), student loan obligations inhibit the possibility of home ownership, the likelihood of starting up small businesses and contributions to retirement savings. In short, student loan debt drags down the American economy.
So why has student loan debt become such an issue as of late? That probably has something to do with the fact that more and more people are borrowing more and more money to finance their education. Which, in turn, is most likely related to the fact that the average price of a college education has increased 1120 percent in the last 30 years. That increase beats the pace of inflation by... a lot. Senator Tammy Baldwin (D-WI), at a recent event on student loans, said that student loan debt has tripled over the past decade. Simply put, student debt is increasing at a rapid pace.
The fact that student interest rates are ridiculously high (six, 10 and even 14 percent rates aren't uncommon) only compounds the problem – continuously, you could say. When interest rates are at historic lows for mortgages, car loans and the like, why have student loans become the exception? Why is the reward for investing in your education higher interest rates and fewer protections than most other kinds of loans allow?
Amidst all the bad news surrounding student debt, there is some good news: Senator Elizabeth Warren (D-MA) introduced the Bank on Students Emergency Loan Refinancing Act recently, which would allow students to refinance their student loans to much lower interest rates. The bill was shot down among almost purely partisan lines, as it seems almost all bills these days are. But President Obama announced that he supports the measure, and there's still hope it will get implemented in the near future.
Refinancing loans is an option many people have wisely used for their home mortgages, car loans and the like. It allows you to take advantage of the current low interest rates to basically re-negotiate the terms of your loan for a lower interest rate. But, for some reason, current law prohibits the refinancing of student loans. Warren's bill fixes that in addition to allowing student loans to be refinanced down to 3.86 percent.
If you're wondering why such an arbitrary number was picked, there's a reason. 3.86 percent is the rate that Congress said last year new student loans should be set at under the Bipartisan Student Loan Certainty Act. New student loans have a 3.86 percent interest rate, and Warren's bill would simply allow people with older student loans to be able to have the same rate. It makes the system a whole lot more fair. As for concerns about effects on the ever-increasing federal deficit, the Center for American Progress estimates that a reduction to a five percent interest rate would add $21 billion to the economy in the first year alone.
Whether you're a fresh college graduate with loans or are responsible for a fraction of the half of the total student loan debt that's owed by people over 30, this issue matters. Even if you don't have student loan debt, your financial security is still dependent on the American economy, which is adversely affected by staggeringly high levels of student debt.
Student loan refinancing may sound lofty and unimportant, but it's an issue grounded in the lives of millions of Americans who can't afford to buy a house or are forced to put their marriage plans on hold because they decided to invest in their education. We, as a society, shouldn't be punishing students for choosing to further their education.
- By Hannah Finnie
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