WASHINGTON, D.C. – U.S. Sen. Sherrod Brown (D-OH) announced new legislation today that would help Americans saddled with costly, private student loans refinance to more affordable options. Brown outlined how his “debt swap” bill would help individuals reduce their student loan debt by refinancing to federal loans, at no cost to taxpayers.
“Students shouldn’t have to sign away their economic futures when they sign-up for college,” Brown said. “Too many Ohioans are still paying for college decades after they graduate – through private loans with fluctuating, high interest rates. My bill would allow borrowers to refinance their costly private loans into more affordable federal loans. These borrowers could see their interest rates cut in half, lowering their payments at no cost to taxpayers.”
In 2007, 63 percent of Ohio graduates at public colleges and 75 percent at private colleges finished school with debt (an average debt of $21,458 for public and $22,737 for private). Approximately 3.3 million students borrowed $22.5 billion in 2007-08 across the nation – a 24 percent increase in the number of borrowers since the 1999-00 academic year. Private loans typically have higher interest rates – that can top 18 percent – and are more difficult to refinance and offer fewer payment options than loans administered by the U.S. Department of Education.
Many students turn to private loans because federal loan limits do not meet their need. Until last year, the federal loan limits for undergraduate borrowers was $23,000 over the course of a student’s education. While Congress has increased the cap to $31,000, the average cost of tuition, fees and room and board was $14,133 per year for 2007-2008 for a public, four-year college. At private institutions, tuition and fees alone averaged nearly $24,000 per year.
More alarmingly, a significant percentage of students bypass federal student loans altogether. In 2007-08, more than 25 percent of borrowers utilized only private loans.
Last year, Congress increased the federal loan limit by $8,000 – to $31,000 for an undergraduate degree. This means that 7 million more borrowers each year are now able to borrow more from the Stafford program rather than turning to the costly private student loans market.
Under Brown’s “debt swap” bill, Americans with private student loans who were eligible for the federal Stafford program but did not utilize their full allowance would be able to refinance into low-interest, unsubsidized Stafford loans, which carry a 6.8 percent fixed interest rate. These new “debt swap” loans would be administered by the federal government under the same terms and conditions as other federal student loans.
"Debt swap" would allow a college graduate who finished school five years ago and now finds him or herself saddled with $8,000 in private student loan debt to refinance. If the borrower was paying a typical private interest rate of 12-15 percent or higher, he or she would be able to refinance that debt into a new unsubsidized Stafford loan carrying a statutorily-determined, fixed interest rate of 6.8%. It’s estimated that this borrower would save more than $2,000 in interest payments over the life of the loan.
The “debt swap” proposal would come at no cost to taxpayers, because unsubsidized Stafford loans generate a small amount of revenue, according to the Congressional Budget Office. Brown’s bill would only apply to private loans made before July 1, 2010 – and the window of opportunity to get a debt swap loan closes on July 1, 2011.
Brown is a longtime proponent of reducing the private loan market and offering students a secure, low-cost federal alternative. Brown is the author of legislation that would create an alternative to private loans through the creation of a supplemental federal loan program that would operate similarly to the Direct Loan program for unsubsidized Stafford and PLUS loan programs.
In April 2008, Brown conducted an official hearing of the Senate Health, Education, Labor, and Pensions (HELP) Committee hearing on college access and affordability at The Ohio State University. The hearing, entitled “Fulfilling the Promise of an Affordable College Education,” addressed the effect the credit crunch on the availability of student loans and the fast growth of high cost private student loans. At the hearing, Brown discussed an analysis showing that the private loan program could outstrip the federal loans program over the next decade.