Katie Shepherd: Bill offers cap on student loan interest

Imagine a law that keeps your student loans from ballooning out of control, holding accumulated interest to a reasonable level.

Proposed federal legislation could do just that.

A provision within the Earnings Contingent Education Loans Act of 2012 provides for an interest cap that would effectively limit the amount of interest that may build up on federal student loans.

The cap’s purpose is to reduce the total amount of money paid by borrowers. Once the interest accumulated on a loan reaches a certain level, the interest rate effectively becomes zero percent for the remainder of the loan’s life.

This interest cap is an important piece of little-known legislation and an effective way of reducing financial and mental strain on graduates. With the cap in place, the growth of student loans would be reined in, giving students the needed relief to focus on starting their careers, instead of dealing with overbearing debt.

And with few gains in the job market, a limit on interest accumulation will benefit students unsure of their ability to repay loans after graduation.

Although an initial attempt to pass the legislation was made last month in the 112th Congress, Congressional Representative Thomas E. Petri (R-Wis.) plans to resubmit the bill to the new Congress for reconsideration, said Kevin James, a legislative assistant for Representative Petri’s office.

Perhaps most importantly, this legislation would improve a federal system that currently lacks protection for those out of college. The current federal Stafford loan system has no protection against infinite growth of interest over the loan’s duration.

Under the new policy, when a student borrows money for school, the loan accumulates interest during matriculation. At graduation, the total debt is noted. After a six-month grace period, graduates begin to pay their loans back, but when the amount of accrued interest equals 50 percent of the amount of money owed at graduation, the loan stops growing.

The longer the life of the loan, the more money borrowers could save, James said.

But the bill’s benefits do not end with the cap. Additional protections in the bill, including income-based repayment, which raises or lowers borrowers’ monthly payments depending on their income, will further aid students worried about repaying expensive loans after graduation.

Furthermore, under Stafford loans, compound interest results in borrowers paying interest on both the borrowed money and interest previously added to the loan. But under the proposed act, the only money used to calculate interest would be the amount borrowed to pay for school.

Currently, federal student loans provide help for enrolled students by covering interest that stacks up during that period with government subsidies. These subsidies can save students up to $4,335, according to the UCLA Financial Aid Office.

But subsidies act only to mitigate the effects of an already poor policy and do not address fundamental problems in the current structure.

The proposed changes in policy would represent a shift in the focus of federal aid from borrowers still in school to graduates and those who have left school and are currently repaying loans, said Ina Sotomayor, associate director for the UCLA Financial Aid Office.

By anticipating the buildup of interest over a student’s career, the Earnings Contingent Education Loans Act can reduce debt, sending students out the door of universities with secure footing.

While subsidies ease the impact of interest on a loan during the borrower’s time in school, they do little to affect the overall interest that accrues over the life of the loan.

Fundamentally, the Earnings Contingent Education Loans Act represents a hard-earned break for students who may view their student loans as an ever-expanding problem. Students would do well to take note of this legislation and push for its approval by the new Congress.

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