New Report Underscores Need to Pass Brown Bill that Helps Borrowers with Private Loan Debt

Report Released This Week Shows that Nearly Two-Thirds of Undergraduate Borrowers Could Benefit from Brown’s Private Student Loan Debt Swap Act

WASHINGTON, D.C. – A new report released this week by the Project on Student Loan Debt underscores the need to pass a bill introduced by U.S. Sen. Sherrod Brown (D-OH) that would help Americans saddled with costly, private student loan debt to refinance to more affordable options.

“Costly private student loan debt is breaking the budgets of too many college graduates,” Brown said. “Nearly two-thirds of college students are not taking full advantage of some of the most affordable student loan options. Many of these borrowers are still paying for college decades after they graduate – through private loans with fluctuating, high interest rates. This report underscores the need to pass my bill that would allow borrowers to swap costly private loans for more affordable options that could cut their interest rates cut in half — lowering their monthly payments at no cost to taxpayers.”

The report released this week by The Project on Student Debt shows that nearly two-thirds (64 percent) of undergraduate student borrowers in 2007-08 did not utilize their maximum share of more affordable federal loans, and that the percentage of undergraduate students who took private loans nearly tripled in four years.

Brown’s Private Student Loan Debt Swap Act of 2009 (S. 1541) would help individuals reduce their student loan debt by refinancing to federal loans, 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 four-year institutions). Approximately 3.3 million students borrowed $22.5 billion outside of federal student loan programs in 2007-08 across the nation – a 24 percent increase in the number of private borrowers since the 1999-00 academic year. Private loans typically have higher interest rates – often with no cap – and are more difficult to refinance and offer fewer payment options than loans administered by the U.S. Department of Education.

There are few tools to help private student loan borrowers weather economic hardship, such as an extended period of unemployment.  During these times, the private loan debt grows faster than the borrower’s ability to repay, creating a mountain of unmanageable debt. In contrast, federal student loans offer income-based repayment and deferment or forbearance options for economic hardship. After 25 years of repayment in the federal programs, the remaining balance of the loan, if any, may be forgiven. For individuals working in public service, loans may be forgiven after 10 years of repayment.

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 loan 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.

For example, "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 percent.  It is 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 on college access and affordability at The Ohio State University. The hearing, entitled “Fulfilling the Promise of an Affordable College Education,” addressed the effect of 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.


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