Bill aims to ease student loan burden
Durbin's legislation would allow many student borrowers to lower interest rates
Mabinty Tarawallie has lived an immigrant's dream — at a high cost.
A native of Sierra Leone, she moved to the United States with her family at age 11. They were a poor family, but her parents impressed on her the value of education.
Despite struggling in school — she didn't know how to read or speak English when she arrived — she graduated from high school, attended Parkland College and completed her undergraduate degree in sociology at the University of Illinois. Two weeks ago, she earned a master's degree in social work from the UI.
"I seized the opportunity my parents gave me," said Tarawallie, 29.
But she and her husband, a UI graduate student in education, also wound up with a crippling $150,000 in student loans.
It's a challenge faced by thousands of students across the United States, said U.S. Sen. Dick Durbin, D-Illinois.
Joined by Tarawallie and UI junior Liv Harmening, Durbin held a news conference at the Illini Union on Wednesday to push a bill that would allow student borrowers to refinance their loans at lower interest rates.
Many student loans carry interest rates of 6.8 percent or higher. But legislation approved last summer lowered the rate to 3.86 for undergraduates who borrow through the federal Direct Student Loan program.
The Bank on Students Emergency Loan Refinancing Act — which Durbin co-sponsored with Sen. Elizabeth Warren, D-Mass. — would allow students with older, higher-interest loans to refinance at lower rates.
It would apply to people who borrowed through the Federal Family Education Loan program and the Ford Federal Direct Loan program, as well as those who took out private loans, which often have variable interest rates, hefty origination fees and few consumer protections, Durbin said.
The new rates would be 3.86 percent for undergraduates with direct loans, 5.41 percent for graduate loans and 6.41 percent for PLUS loans taken out by parents. Borrowers would have to establish eligibility; the program would not be open to those who have already defaulted.
Durbin said it would help some students finally pay down the principal rather than just make interest payments.
He said student debt in the United States has reached a "breaking point," totaling $1.2 trillion, more than credit-card debt and second only to mortgage debt. About 44 million Americans are paying off student loans, including 1.7 million in Illinois, he said. On average, Illinois graduates in 2012 left with $28,000 in debt.
"If we are going to give the students of working families a fair shot at affordable higher education, we have got to come up with a way for those families and their students to borrow the money necessary to get through school," he said.
Because interest rates are low, the government is essentially making money off those student loans, Durbin said. The refinancing bill would be paid for by imposing the "Buffett rule," as Durbin put it. Investor Warren Buffett has proposed a minimum "millionaire tax" on wealthy Americans who pay a lower effective tax rate than Americans with modest earnings, he said.
Durbin said the bill could be voted on as early as next week in the Senate. He expects opposition from Republicans and others against any tax increase, but said this is an issue that hits home with many voters and legislators.
"There's so many people who have lived through it and know somebody going through it," he said. "They're worrying about how these young people's lives will be impacted."
Tarawallie said she was able to get through her undergraduate years without much debt, but had to spread out her graduate studies over three years as she raised her three young children. She had one graduate assistantship, but had to pay for the rest with loans.
She said she'd always dreamed of being a social worker so she could help others pick themselves up out of poverty as well, and a bachelor's degree wasn't enough. Still, with modest pay and uncertain job prospects in that field, she's worried about how her family will cope with a debt three times what her annual salary is likely to be.
Currently, her loans carry interest rates of 4.7 to 7.9 percent, and with the Refinancing Act they'll drop to 3.86 to 6.41 percent.
"It may not sound like a lot, but for someone like me, with a family, it makes a difference," she said.
Dan Mann, UI director of financial aid, said the new rates would provide flexibility for students who are struggling to repay their debt by making payments more affordable. About half of the UI's undergraduates borrow for their bachelor's degree, graduating with an average $24,657 in debt.
The bill would mostly benefit UI graduate students, who pay higher rates than undergraduates, Mann said. It would also help the roughly 1,200 undergraduates who have taken out almost $16.5 million in higher-priced private loans, Mann said.
About 3.4 percent of UI graduates default on their loans within three years, compared to 14.1 percent statewide and 14.7 percent nationally. The higher rates are inflated by harmful loan practices at for-profit universities, which often steer students into higher-cost loans with poor repayment terms, Durbin said.
The problem has impact far beyond students and their families, he said.
"There are so many young people with debt from worthless for-profit colleges who can't borrow money to go to a real school. Some of them burdened with student debt can't buy a car, couldn't consider buying a house," he said. "I've had them literally tell me that 'We can't have kids because of our student debts.' So it really is impacting their participation in our economy."
How it would work
Examples of how people might be affected by the Student Loan Refinancing Act, per the Congressional Research Service:
An undergraduate borrows $30,000 in unsubsidized direct loans (meaning interest accrues while the students is in school).
Original interest rate: 6.8 percent.
Proposed refinanced rate: 3.86 percent.
Difference in total amount paid, including administrative fee: $4,133.
A graduate or professional student borrows $30,000 in unsubsidized direct loans.
Original interest rate: 6.8 percent.
Proposed refinanced rate: 5.41 percent.
Difference in total amount paid: $2,527.
A parent borrows $50,000 in PLUS loans.
Original rate: 7.9 percent.
Proposed refinanced rate: 6.41 percent.
Difference in total amount paid: $3,503.
Note: Figures include assumptions that borrowers are repaying loans per the standard 10-year plan and that they have already made regular payments to their loan prior to it being refinanced at lower rates.
How student loans at the University of Illinois Urbana-Champaign break down:
Percentage of undergraduates who borrow: 52% (national average 71%)
Average student debt upon graduation: $24,657 (national average $29,400)
Default rate after three years repayment: 3.4% (national average 14.7%)