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Reform Student Loans to Cap Amount of Payment That Goes Toward Interest

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Congress must be urged to close the loophole in the usury laws in the student loan banking industry. The percent of any monthly payment going toward interest should be capped at whatever the annual percentage rate (APR) is, with the balance allocated toward principle. For example, if a student loan has a 5 percent APR and the monthly payment is $100, only $5 should be allocated to interest while $95 is allocated to principle. This will allow banks to earn a reasonable amount of interest on loans while allowing graduates to pay off a loan in a reasonable amount of time with a median salary. This reform must apply to all banks providing student loans, including federal and private loans.

Today’s graduates, who comprise tomorrow’s middle class, innovators, and entrepreneurs, have become indentured servants to the banking industry and are unable to achieve any of the dream that America once had to offer. This is partly because of lack of regulation regarding bank usury. On any given minimum monthly payment on a student loan, as much as 60 percent of that payment may automatically go toward interest rather than principle. It is no wonder that it takes graduates up to 30 years to pay off their student loans, if they are able to at all, all the while delaying economic and social decisions such as to marry, have children, buy a home, invest in retirement accounts, or otherwise stimulate the economy. Recent analysis of the student loan industry demonstrates that it could be the next bubble to burst and needs comprehensive reform that includes lowering and maintaining realistic tuition rates coupled with no or low-interest loans by banks with reformed usury laws.

A new report by the Institute for College Access and Success showed that as college tuition continues to drastically rise, so does student loan debt at an equal pace. Nearly 70 percent of today’s bachelor’s level graduates carry student loan debt. These numbers do not include graduate students, including doctoral, law school, and medical school graduates, many of whom carry more than $100,000 in student loan debt. In 2010, student loan debt exceeded credit card debt for the first time, and student loan debt is now nearing $1 trillion. According to the U.S. Department of Education, nearly 9 percent of federal student loans were in default as of 2009, the latest numbers available. Almost 6 percent of private loans were in default in 2010. According to the Institute for Higher Education Policy, two out of five graduates fall behind on student loan payments within the first five years of repayment. Federal and private student loan debt combined equals approximately 7 percent of GDP. As the middle class continues to erode, it becomes more difficult for people to afford continually increasing tuition rates. And as the cost of education continues to skyrocket, we can expect that these student loan debt numbers will increase.

President Obama recently announced a nice gesture to cap payments of federal loans at 10 percent instead of 15 percent and to forgive debt after 20 years instead of 25 years. This will help only a small number of people. Under the President’s loan plan, many PLUS loans and federal loans for health professionals are not eligible. Neither are already consolidated loans and loans in default. Most importantly, private loans are not only not included in the payment cap, but they are also not included in determining discretionary income from which the cap is based.

Reform is desperately needed, and Congress should be urged to close the loophole in the usury laws in the student loan banking industry. When the student loan bubble bursts, which is as inevitable as the housing bubble's burst, Congress cannot say that they hadn’t been warned.

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