There's good news, and maybe better news, for student loan borrowers. But it won't solve the problem of more than 40 million Americans who together have $1.2 trillion dollars of student loan debt outstanding. That huge and growing burden of student loans outstanding is impacting the entire economy, as young graduates postpone having families and buying homes under the burden of repaying their debt.
The good news is that if you are a student taking out a loan for the 2015-2016 academic year, you will pay a lower lifetime rate on that loan. Those student loan rates are set every year, based on the 10-year Treasury note auction. And this year the rates on government securities have been near record lows.
Loan Rates Dropping
Starting July 1, the interest rate on new Stafford loans for undergraduates drops from 4.66 percent to 4.29 percent. The rate on new direct loans for graduate students drops from 6.21 percent to 5.84 percent, and the rate on PLUS loans to grad students and cosigning parents will fall from 7.21 percent to 6.84 percent over the life of the loan.
Of course, if the Fed starts raising interest rates in the coming months, next year's loans could come at a much higher rate. So, when it comes time to repay those loans, you'll want to repay the highest rates loans first. But that's years down the road.
In the meantime, you might have noticed that student loan interest rates are no real bargain -- even at the lower levels for next year. Sure, they're far less than credit card interest rates, but they're still far above rates on 15-year mortgages (currently averaging 3.14 percent, according to Bankrate.com).
Since student loans are "secured" not only by a student's future earnings (you can't go bankrupt to avoid repaying) but by future Social Security payments (if you haven't repaid by the time you retire), it's perhaps unfair that they carry a much higher interest rates.
And, as noted above, the current "low" rates are actually temporary. When the Fed gets around to "normalizing" rates -- or when the global marketplace demands a higher rate to accept dollars -- student loan rates will rise again.
Lender Practices Scrutinized
What may be better news is that the Consumer Financial Protection Bureau is taking a hard look at how student loan borrowers are being treated by the lenders. Richard Cordray, director of the CFPB, said the agency is looking into whether protections such as those offered to credit card users should be extended to student loan borrowers.
The problems revolve around the servicing companies hired by the lenders to collect and process loan repayments.
The original lenders can contract out the servicing process, and change those service providers, without any notification to the borrower. And because those servicers are compensated on the number of accounts handled, and the amount of months the loans stay on the books, there is absolutely no incentive to provide helpful advice to borrowers.
The complexity, lack of transparency and frequent changes in servicers makes it difficult for students to make sure their payments are being credited properly -- even when they sign up for automatic monthly payments, according to the CFPB.
Director Cordray sees the issue as having national financial impact: "As a growing share of student loan borrowers reach out to their servicers for help, the problems they encounter bear an uncanny resemblance to the situation where struggling homeowners reached out to their mortgage servicers before, during and after the financial crisis. ... The Consumer Bureau is concerned that inadequate servicing is also contributing to America's growing student loan default problem. At this point, about 8 million Americans are in default on more than $100 billion in outstanding student loan balances."
The student loan issue is getting a powerful ally to help individuals work their way through the repayment process. The CFPB is now reaching out to hear your stories. If you want to tell your story, go to ConsumerFinance.gov and click on the prominent link to "Tell us about your student debt stress." Or use the hashtag #StudentDebtStress.
The CFPB is an agency known for moving swiftly -- in government terms -- to deal with problems. And since your student loans are likely to hang around for at least 10 years, it might be worth your while to complain publicly. If a pattern quickly emerges showing especially egregious behavior on the part of a student loan servicing company, it will likely become the first public target. And that's The Savage Truth.
(Terry Savage is a registered investment adviser and the author of four best-selling books, including "The Savage Truth on Money." Terry responds to questions on her blog at TerrySavage.com.)
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