The student loan debt crisis has been years in the making, and it has been helped along by some lawmaking and archaic loan provisions, which have exacerbated the financial struggles of many student borrowers. With all eyes on the mounting debt total ($1.4 trillion) and the average debt load per borrower ($28,000), it has only been recently that lawmakers have begun to identify many of the root causes of those struggles.
Certainly, rising tuition costs are the main contributing factor to the growth of student loan debt, of which little can be done in the near term to reverse that trend. However, it could be some of the loan provisions hidden beneath the surface helping to handcuff borrowers in their attempt to free themselves from financial servitude. One such provision almost guarantees that borrowers make extra payments to try to pay down the loan more quickly.
Student Borrowers Cheated Out of Prepayment Benefits
At issue is the method by which extra payments are applied to the loan balance. When borrowers make extra payments, the assumption is that they are first applied to the principal balance which would accelerate the loan payoff. Most people would make that assumption based on the way extra payments are applied to mortgages and car loans, which is to reduce the principal balance. By paying down the principal balance, borrowers reduce the length of the loan as well as their total interest costs. So, student borrowers are understandably perplexed when they learn their extra payments might actually be applied to interest costs or future payments unless otherwise specified.
HR 3836 – Student Loan Fair Prepayment Act Rights a Wrong
HR 3836 – Student Loan Fair Prepayment Act, which was introduced to Congress on September 26, 2017 by Rep. Susan Davis (D-CA), seeks to remedy that by amending the portion of the Higher Education Act of 1965 that authorizes it. Under the new Act, prepayments on all federal loans will be applied first to any outstanding fees and then towards the principal balance.
If there are multiple loans, they will be applied first to the loans with the highest interest rates and second to the loan with the highest balance if multiple loans have the same interest rate. Private lenders will also be required to apply prepayments in this manner. In all cases, borrowers can opt to have prepayments directed according to their wishes; so, if they prefer to pay down loans with the highest balances first, they can choose that option.
HR 3836 was introduced along with another Susan Davis-sponsored bill – HR 3835: Eliminating The Hidden Student Loan Tax Act – which seeks to repeal unnecessary loan origination fees that are nothing more than a tax on student borrowers. Both pieces of legislation have garnered bipartisan support, especially following an election year in which student loan debt became a highly charged issue. While both bills would effectively reduce the amount of revenue the government receives at the expense of student borrowers, it is money the government neither needs nor deserves. Not when millions of student borrowers are forced to delay or forego life events such as buying a house or starting a family.
Author: Jeff Gitlen
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