- — Repaying student loans can be a drag — and not just on your own finances.
This month, the Senate Budget Committee held a hearing on the effect of student debt on U.S. economic growth. The hearing follows a growing body of research that suggests education debt, which tops $1 trillion nationally, is keeping today’s 20-somethings from taking key financial steps — from buying homes or starting businesses to saving money for retirement.
“There’s a student debt domino effect,” said Rohit Chopra, student loan ombudsman for the Consumer Financial Protection Bureau, who spoke at the hearing. He says loan repayment can soak up so much income that graduates have little money left to dedicate to other purposes.
In a survey last year by the National Association of Realtors, for example, 49 percent of people said education debt was a huge obstacle to homeownership.
The survey was based on responses from 2,000 adults 18 and older.
And a report released in May by the Pew Research Center, which analyzed the latest Survey of Consumer Finances by the Federal Reserve, found that households headed by college-educated young adults with zero student loan debt had a typical net worth of $64,700.
In contrast, young households with education debt typically had a net worth of only $8,700.
In light of these trends, Senate Democrats last month introduced legislation that would allow students to refinance their student loans at a lower interest rate.
The proposal, sponsored by Sen. Elizabeth Warren, D-Mass., aimed to help make repayment more affordable for graduates.
“Giving students the chance to refinance their student loans to today’s (low) rates is a free market approach that would go a long way toward easing this burden” of debt, said Sen. Patty Murray, D-Wash., a co-sponsor of the bill and chairman of the Senate Budget Committee.
But the Senate voted Wednesday to block the bill from moving forward. The legislation would have allowed borrowers to refinance federal and private student loans. Bundling the two types of debt would have been a difficult measure to pass, says Mark Kantrowitz, senior vice president and publisher of Edvisors Network, an online resource for student loan information.
“What lender would offer private student loans if there’s a chance the federal government would take those loans away (through refinancing)?” he said. Also, the bill would have relied on the so-called Buffett Rule for funding, which sets a minimum tax rate for those earning more than $1 million.
Kantrowitz argues that the real problem is not the cost of debt, but the amount of loans that students have to borrow to cover the cost of college.
“If their loan payments are pushing them over the edge, it’s usually because the students had to borrow too much money,” he said.
Even so, President Barack Obama took executive action Monday to expand an income-based repayment program to more borrowers. The expansion of the program, which caps monthly repayment to 10 percent of a borrower’s income, won’t take effect until December 2015. At that point, an estimated 5 million additional borrowers will be eligible.
The flurry of attention on student loan reform may be encouraging, but what if you need help with repaying your student loans now? There are things you can do.
For federal student loans, you have a number of repayment options, not just income-based repayment, that will lower your monthly bill. To learn about them, go to http://studentaid.ed.gov.
For private student debt, your choices are more limited. If you’re having trouble managing the loan, speak with your lender, or contact the Consumer Financial Protection Bureau at ConsumerFinance.gov. Some refinancing is available.
SoFi, a network of peer-to-peer lenders, may offer loans at rates lower than loans issued by banks. To learn more, go to SoFi.com.