President Barack Obama recently signed a memorandum called the Student Aid Bill of Rights, which directed the U.S. Department of Education and other federal agencies to help ease the burden of debt on student borrowers. Angela Lyons, a professor of agricultural and consumer economics and director of the Center for Economic and Financial Education, is an expert in household finance, credit access and bankruptcy. Lyons spoke recently with News Bureau education editor Sharita Forrest about student loan financing.
What is your reaction to the president’s Student Aid Bill of Rights?
It is a wonderful first step, but it’s still not solving the problem.
I teach a class on intermediate financial planning, and every year we calculate how much savings a family would need to pay for a college education at a public university, such as the University of Illinois, if they had a child today, and tuition rates continued to rise at the current rate. It’s currently well over $300,000.
This isn’t sustainable. If we don’t address college costs or the amount of loan debt that students are accumulating, we’re putting Band-Aids on the problem.
The Consumer Financial Protection Bureau in Washington, D.C., recently issued a report about the rising number of complaints about private student loan providers and servicers.
This bill of rights will create a version of the CFPB within the Department of Education, so borrowers can call a hotline and get help figuring out how much they owe and the repayment options available to them.
From that standpoint, this bill of rights is wonderful.
Where do you think legislators should concentrate more effort to better help student borrowers?
Just from last year to this year, total student loan debt in the U.S. went from $1.2 trillion to $1.3 trillion – an increase of $100 billion. Legislation is not addressing that.
Many people have loans from 10 to 20 years ago. Letting them refinance and reduce their interest rates of 6 to 10 percent down to the current 4- to 5-percent rate would reduce their payments and help pay off the principal.
Sen. Elizabeth Warren of Massachusetts recently sponsored a refinancing bill, but it failed in the Senate. Lawmakers may have been concerned about how it would be paid for, because Warren’s proposal was a Warren Buffett-like tax on the wealthy.
The other option, which will be slower to come but must happen, is loan modifications, similar to what happened after the 2008 mortgage crisis. There are some successes there that we might apply to the student loan industry to help borrowers get affordable loans with better terms and conditions.
Again, we’d have to determine who’s going to pay for it.
An option that’s already available is the public service loan forgiveness program. If you work for the government or a qualifying school district, public hospital or nonprofit, you may qualify to get some of your debt forgiven. Many people are not aware of that and how to qualify.
We need industry to provide counseling to people and make sure they’re getting information from credible sources.
With student loan debt continuing to spiral upward, do you foresee changes to the bankruptcy laws so students can discharge their debt?
Currently, students can’t discharge federal student loans through bankruptcy. Private student loans will probably become eligible for discharge in the future.
The bankruptcy reform legislation in 2005 closed a loophole that enabled some students to charge tuition and other college expenses on credit cards, and later file bankruptcy and have it discharged. During that time, I counseled students with $70,000 or $80,000 in credit card debt. To be honest, they had a good gig going – but the government caught on and closed that loophole.
Now, the government is worried that if students are allowed to discharge private student loans, we’ll see an increase in bankruptcies among recent college graduates. Lawmakers have to work out those details before they’ll feel comfortable pushing any legislation.
Are the PLUS loans for parents better options than conventional student loans?
I think greater awareness is needed of the risks associated with parent loans, because they do not work the same way as student loans.
The PLUS loans have higher interest rates, and the terms aren’t as flexible. There are also fees associated with parent loans that aren’t associated with the federal student loans.
If the student isn’t making sufficient income to meet their payments after graduation, they can get changed to the income-based repayment plan. However, parents can’t do that – and many don’t realize that.
A representative from a credit-counseling agency spoke to my class recently, and the agency saw a case where a parent with a PLUS loan died. Repayment fell to the student – with the entire balance due immediately.
Parents may want to avoid PLUS loans and let their child take out student loans first. Parents can always make the child’s payments for them, or assist them with payments, if necessary.