Today, the Senate failed to extend the current 3.4 percent interest rate for subsidized student loans, making it even more likely that college students borrowing for the fall semester will have to pay much more for the privilege of higher education.
Even if the bill had passed, the Senate’s vote was essentially symbolic, since the Republican House leadership has repeatedly stated that their only solution is to allow the market to set the interest rate on student debt. However, amongst all the uproar over this likely doubling of the interest rate, the true student debt crisis has been largely ignored. After all, the increased interest rate will only affect future borrowers; it has no effect on the nearly 40 million Americans who already owe a collective $1 trillion in outstanding student debt.
And it is this existing $1 trillion that is damaging not only to the financial futures of tens of millions of Americans but the entire U.S. economy. Student debt has caused many borrowers to be unable to buy homes; first-time buyers now account for the lowest share ever of all home buyers. Debtors are also delaying saving for retirement, buying cars, and even getting married because of their student loan burden. The impact of these delays on indebted households’ financial futures, however, can only be guessed at, since our country’s experiment with this “debt-for-diploma” system is really just a decade old: outstanding student debt totaled just $240 billion in 2003. Still, the impact of student debt on the country’s economy as a whole is already being felt: in March, the Federal Reserve identified student debt as one of the major drags on the country’s future economic growth.
This emphasis on the huge burden of existing student debt isn’t intended to dismiss the impact that the doubling of student loan interest rates will have on future borrowers, who will pay an extra $41 billion in interest over the next decade because of the hike. But instead of simply debating a policy that will only affect future borrowers, Congress should be considering a larger solution, one that will reduce the burden of student loans on both current and future borrowers. Such a solution should include allowing borrowers to refinance their student loans at a lower interest rate, and once again make student loans, both federal and private, dischargeable in bankruptcy. It should also provide for expanding and strengthening the Income-Based Repayment plan, which effectively forgives a portion of low-income borrowers’ loans.
These reforms, along with a lower interest rate for future borrowers, would be one of the most effective and least expensive ways we could provide a much-needed boost to our stagnant economy, while simultaneously reducing the burden of student debt on the tens of millions who already owe and the millions borrowing today just to try to reach the middle class.