While speaking at Michigan State University on Monday, Sen. Gary Peters (D–Mich.) presented the details of the proposed Fair Student Credit Act, a bipartisan collaboration between Peters and Sen. Shelley Moore Capito (R–W.Va.). The proposed legislation is an attempt to help students regain good financial standing and avoid the pitfalls of student loan default and was initially introduced to the House in 2013. Applying a similar credit rehabilitation procedure to that of federal loans, the bill provides students with the beneficial opportunity to repair their credit after defaulting on private student loans, as long as borrowers follow a schedule of nine consecutive payments. By doing so, the Fair Student Credit Act eliminates some discrepancies between public and private loans. The legislation intends to ensure students who needed to rely on these loans to finance their education will not face long-term credit damage because of continued financial difficulties after graduation and should be passed. However, the bill should be more comprehensive in order to be more beneficial to students.
For students coming from lower socioeconomic backgrounds, the exorbitant costs that come with obtaining a college education often make taking out a private loan a necessity rather than an option. In the past 30 years, the average published price of in-state college tuition and fees for public universities has risen by 225 percent adjusted for inflation, which could account for the prevalence of private student loans today. About one-fifth of debt from graduates of the class of 2012 was from private loans, and a good number of students have had difficulty paying these loans. Approximately 850,000 private student loans are in default — according to the Consumer Financial Bureau — constituting a sum of roughly $8 billion in debt. Even after obtaining a degree and incurring debt, the current economic conditions may inhibit graduates’ ability to maintain, or even start, repaying the loans they accrued. Washtenaw County boasts some of the highest wages in the state, but overall, workers in Michigan earn less than the national average on their weekly paychecks. This could make it difficult for graduates working lower-income jobs while searching for a position in their desired field to pay back their loans.
During his announcement, Peters stated, “It’s simply unfair to deny some graduates the ability to get their finances back on track after a default simply because their loans are private instead of public.” Currently, discrepancies between federal and private loans may worsen the situation financially struggling graduates find themselves in if they do default. Private loans, unlike federal loans, don’t have fixed interest rates. These variable interest rates — ranging from roughly 3 to 12 percent, depending on the lender — fluctuate throughout the period, which can increase the overall amount due at the end of students’ college careers. Private loans don’t regularly offer deferments or forbearance plans if students are experiencing issues finding employment or if their income is insufficient to maintain payments. Furthermore, private loan borrowers are at even more of a disadvantage due to the shorter period in which an inability to pay can lead to default. Unlike federal loans, which go into default after 270 days of no payment, private loans are deemed in default after being unpaid for 120 days.
These discrepancies between private and federal student loans, beyond credit rehabilitation, need to be addressed. To make college more accessible, all types of student loans should work to help and accommodate students, not hurt them. The Fair Student Credit Act should be more encompassing in addressing these inconsistencies between private and federal loans. Even in terms of credit rehabilitation, the legislation doesn’t fully solve the issue. As it stands, the bill wouldn’t mandate that private banks comply, so there would be no guarantee that the default would be erased from a borrower’s credit history. This could mean that, even if the bill passes, many banks will continue to damage students’ futures over financial difficulties that can be the inevitable result of higher education for many people. Additionally, the private banks’ lack of accountability could create confusion for students regarding the consequences of defaulting on private student loans. In absence of requiring private banks to erase these defaults from the credit history of student borrowers who successfully make the nine consecutive payments, private banks should at least have to be abundantly clear and up-front about whether or not they will comply with the Fair Student Credit Act.