By Ian Edwards
The California State Student Association, a statewide organization that represents the interests of students in higher education, unanimously endorsed the Student Loan Refinancing and Recalculating Act last Wednesday. This act, proposed by former UC Regent and US Congressman John Garamendi, seeks to institute several comprehensive measures to reduce the burden of student debt nationwide.
Congressman Garamendi, a Democratic representative of California’s third district including the Fairfield, Davis, and Yuba City areas, unveiled his plan on May 3 at the University of California, Davis.
According to Garamendi, the proposal will produce four outcomes: refinancing student loans, recalculating student loans, reducing the debt burden for students and reinvesting in society and economy.
Under the new proposal, government student loans, which currently cannot be refinanced, will be able to be refinanced, or the interest rate on the loan can be lowered to a more reasonable cost for the student.
The federal government gives out four kinds of student loans under the William D. Ford Federal Direct Loan program: direct subsidized loans, direct unsubsidized loans, direct PLUS loans and direct consolidation loans, which are combinations of any of the aforementioned loans. The federal government also has a school-based loan program, the Federal Perkins Loan Program, in which schools themselves are lenders to students with exceptional financial need.
Direct subsidized loans are reserved exclusively for undergraduate students at an interest rate of 4.29%. Unsubsidized loans are available to both graduate and undergraduates, however, undergraduates have a lower interest rate of 4.29% whereas graduate and professional students have an interest rate of 5.84%. With direct PLUS loans, the interest rate is at 6.84% for all borrowers. Federal Perkins loans are set with an interest rate of 5%.
According to Garamendi’s office, the average amount of student debt is currently $35,051 dollars for undergraduate students and $57,600 for graduate students. Based on rate adjustments, Garamendi’s bill would save an undergraduate student approximately $2,760 and a graduate student $3,480 over the life of their loan.
“One in seven borrowers default on federal student loans within three years of beginning repayment,” said Garamendi in a statement. “We know that 30 percent of federal direct student loan dollars are in default, forbearance, or deferment, and at least 40 million Americans are burdened by student loan debt.”
Garamendi estimates that the country’s own interest rate for a ten-year loan is “just under 2 percent.” Garamendi’s bill would set the the interest rates of student loans to match this rate, so when factored with administrative costs, the set interest rate for all government student loans would come out at 3.23 percent.
The bill would also alleviate other economic burdens on the loan payer, such as by eliminating origination fees, or fees paid to a lender in exchange for processing the loan. These origination fees, as determined from the first disbursement of a loan, can cost the student thousands of dollars, Garamendi claims.
The bill also puts a forbearance on interest for low-income students, or students whose expected family contribution is at or under $10,000. This forbearance will only be in place until after the student has already graduated college, so during college only the principal will have to be paid by students who qualify.
The economic impacts of the bill, Garamendi believes, will include freeing up capital that students would otherwise use to pay off their student loans and allowing it to circulate back into the economy.
Garamendi emphasized the level of debt accrued by graduate students. Many graduate students expressed their support for this bill during his address at UC Davis.
“This debt burden limits our ability to work in the public sector,” said UC Davis Graduate Student Association External Chair Jacqui Barkoski. “This financial burden affects graduate student well-being including reports of depression, and difficulty paying for basic needs like food and housing.”
Garamendi has a history of opposition to increases in student loan interest rates, voting down multiple tuition increases and supporting bills for lower rate adjustments.
“We are going to eliminate or at least reduce the burden on the students,” Garamendi said in his UC Davis address. “The Federal Government ought not be profiting off the backs of the students, in any case.”
Since the bill was introduced, it has been cosponsored by 24 members of Congress. The bill must continue to gather congressional support before it advances in the House.