WASHINGTON, D.C.—Several
consumer and student groups criticized legislation introduced by U.S. Rep. John
Boehner (R-OH) and others on the House Education and Workforce Committee because
it could more than double the interest paid on student loans.
The groups urged Congress
to protect borrowers and their families from the potentially dramatic increases
in student debt. Eliminating the opportunity for borrowers to lock in a low
interest rate by consolidating their loans and increasing the cap on interest
rates on all loans—to 8.25 percent from 6.8 percent—in the proposed
"College Access and Opportunity Act" would increase the debt burden
for millions of former, current and future student borrowers while increasing
profits for traditional lenders. However, the groups did praise a section on
the bill that would leave in place aggregate loan limits.
Eliminating fixed rate consolidation
could more than double the cost of interest on the average $17,000 federal loan,
based on a report by the nonpartisan Congressional Research Service. The average
borrower consolidating now would pay $5,500 more in interest under this legislation.
Fixed rate consolidation
offers real financial choices for borrowers, but this measure would make it
a less attractive and more expensive option. Despite claims the bill would allow
greater flexibility to consolidate loans with different lenders, it actually
would make the option unattractive and jeopardize real competition. Provisions
in the bill, such as increasing the cap on interest rates to 8.25 percent and
requiring borrowers to tell their lender if they want to consolidate with another
company, would create a large disincentive for graduates to seek out competitors
to Sallie Mae and other traditional lenders.
"For Congress to make
finance charges on the same college education nearly twice as expensive by cutting
back on student borrower benefits like consolidation is irresponsible,"
said Rebecca J. Wasserman, president of the United States Student Association.
She also pointed to provisions
in the bill to extend the standard length of time for repayment as illusory
reforms because they increase the cost of a student's debt and lenders' profits
over the life of the loan, even if total borrowing remained the same.
Regardless of whether borrowers
choose to consolidate their loans, they still would face the higher 8.25 percent
cap on interest rates as the Congressional Budget Office predicts rates will
rise significantly over the next decade. That change, which could cost borrowers
millions of dollars more in interest, is a broken promise to groups that compromised
with Congress two years ago and agreed to the 6.8 percent cap.
"It is hard to believe
that some Members of Congress would consider raising the cap on the interest
rates they agreed to," said Merriah Fairchild, the CALPIRG Higher Education
advocate. "To propose raising the caps on interest and making borrowing
more expensive is mind boggling."
According to a recent Nellie
Mae study, 38 percent of student borrowers have delayed buying a home and 30
percent have delayed buying cars because of student-loan burdens. This means
money that could be used to support the economy and establish financial stability
instead is going toward debt service.
"Helping get young
Americans on their feet and easing the enormous burden of paying off their student
debt is good public policy, and the federal student loan consolidation program
has provided a tremendous benefit to millions of young people over the past
several years," said Luis Figueroa, policy analyst with the Consumers Union.
"Students are graduating
from college with increasingly unmanageable levels of debt. The payment shocks
recent graduates would very likely face with variable rates or under extended
repayment plans threaten their homeownership prospects and long term financial
stability," said Brad Scriber, a spokesperson for the Consumer Federation
of America.
The bill fails to protect
student credit histories because it does not require lenders to report both
positive and negative payment histories on student loans to all national credit
bureaus. Not reporting positive payment information can distort credit reports
and unfairly lead to higher rates on auto loans or home mortgages.
"Student and consumer
groups called on members of the House panel to pass legislation with student
borrowers and their families in mind, not Sallie Mae and the big banks,"
Wasserman said.
