It may have taken Congress a while to act on the student loan debt problemin some way, but at least some politicians in congress are finally starting to take it seriously. Several bills have been introduced this year targeting the burden that $1.4 trillion of debt is creating for student borrowers.
With more than 44 million Americans carrying an average of $28,000 of student loan debt, there can’t be a single congressperson whose constituents aren’t impacted by this growing socio-economic issue. The most recent legislation to be introduced – H.R. 3835: Eliminating The Hidden Student Loan Tax Act – gets right to the heart of the matter by repealing the authorization to charge origination fees on Direct student loans.
Who is Sponsoring the Act?
Student loan origination fees are an “expensive relic and unnecessary tax on borrowers,” according to the National Association of Student Financial Aid Administrators (NASFAA). NASFAA is a non-profit membership organization made up of about 3,000 colleges and universities in the U.S. Its primary focus is on creating and advocating for student aid legislation to benefit undergraduate students.
NASFAA co-authored H.R. 3835 with Rep. Susan Davis (D-CA) who introduced it to the floor of the House on September 26, 2017. The bill specifically targets the origination fees charged on federal loans, which were authorized under the Higher Education Act of 1965, but didn’t become a practice until the 1980s. The Act is due for reauthorization, so this new legislation seeks to amend the Act to repeal that authorization.
Why Are Their Origination Fees Anyway?
Back in the 1980s, student loans were originated by private lenders who were authorized to charge fees to offset their costs. In 2010, the federal government started originating loans directly, but they kept charging the origination fees, which have now become a multi-billion dollar source of revenue for the government. Currently, the fee amounts to 1.073 percent for Direct Loans and 4.292 percent for Parent and Graduate PLUS loans.
To the best of anyone’s knowledge, the loan fees are not actually used to pay for administration costs. They remain simply because no one has bothered to question them or ask for their removal. In essence, they are just a government tax levied on the people who can least afford it. What makes it more insidious is that the federal government doesn’t disclose the full cost of borrowing as private lenders are required to do. Private lenders must include loan fees when calculating their annual percentage rate, but federal disclosures don’t include them, so borrowers don’t get to understand their full cost of borrowing.
What is the Status of the Bill?
The bill was just introduced recently and it appears to have bipartisan support. It would be hard to imagine any congressperson standing up to try to defend this unnecessary tax on a segment of the population that is struggling to pay for college, let alone make ends meet after graduation. This bill is not expected to solve the student loan debt problem, but If Congress is expected to reauthorize the Higher Education Act, which over the decades has become seriously flawed anyway, this one simple amendment could be a positive step in the right direction.
Author: Jeff Gitlen
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