The push to revive the bankruptcy provision for private student loans may provide some financial relief for Americans that are struggling with student-loan debt. But the inherent problem — rising tuition costs — still requires attention.
Yesterday, Sen. Dick Durbin appeared in a Senate judiciary subcommittee hearing to promote a bill, introduced in May, that will allow private student loans to be discharged in bankruptcy.
“In many respects, private student loans are just like credit cards — except unlike credit card debt, private student loan debt cannot be discharged in bankruptcy,” Durbin in prepared remarks.
“This harsh treatment of students in the bankruptcy system was built on the false premise that students were more likely to ‘abuse’ the bankruptcy system,” said Deanne Loonin, an attorney for the National Consumer Law Center, in a written testimony to the Senate.
But, I would remind them that the high cost of a college education is at the root of the problem.
A $456,000 bachelor’s degree
According to the Federal Reserve Bank of New York, total student loan balances in the country is roughly $870 billion, exceeding total debt from credit cards and auto loans.
Without the alarming costs to send a child to college, lenders wouldn’t be able to pitch private loans and the balances on student loans wouldn’t be so massive.
I have younger relatives who just started school and opted to go to city colleges for lower tuition costs. It also allows them to live at home, further minimizing living expenses. They could have attended more expensive schools, but the increasing concerns of debt and the economy have convinced them to play it safe.
The average cost of tuition at a private school is $28,500, according to the College Board. College tuition increases by roughly 8% per year, according to FinAid — meaning that the cost of a college education doubles every nine years.
At that rate, a child born today would be responsible for $456,000 in tuition costs for a four-year degree. Lenders will have a blast hawking private loans to pay for that.
It’s not just private student loans that have the ability to leave graduates with an enormous financial burden. But Durbin’s bill does not offer bankruptcy protection for Federal student loans.
“Federal student loans have fixed, affordable interest rates,” said Durbin. “They also have a variety of consumer protections, such as forbearance in times of economic hardship, and they offer manageable repayment options such as the income based repayment plan.”
Unfortunately, there is the possibility that the interest rate for subsidized Stafford loans will increase to 6.8 percent from 3.4 percent. Or, to put it another way, rates are now slated to double to more than twice today’s prime rate of 3.25 percent.
Again, this change will have a greater impact with higher tuition costs. A proposed bill would forgive outstanding balances for certain borrowers with federal student loans, but it also does not address the rising costs of a college education.
Good for now, what about later?
With diseases, it’s easier and cheaper to prevent than to cure it. The same concept applies to debt.
“In this difficult economy, we know that people are struggling, including many who had been entrenched in middle class jobs. Bankruptcy may be the only option for many of these individuals,” said Loonin. “Bankruptcy is not and should not be the entire safety net, but it is the most organized and effective system we have to offer relief to those who need it.”
For now, this is just a reactionary step. It is just part of the cure.
We need prevention. Let’s do something about tuition costs.