The law will fix student loan interest rates to the 10-year U.S. Treasury note instead of using the current arbitrary formula. It will also establish interest rate ceilings and lock interest rates for the loan’s lifetime. In the process, interest rates will be slashed for the upcoming 2013-14 academic year, with undergraduate rates reduced from 6.8 percent to 3.86 percent.

The law will also retroactively apply to loans taken out after July 1, when interest rates on federal Stafford loans doubled after Congress failed to prevent the expiration of subsidies. Stafford loan interest rates subsequently doubled from 3.4 percent to 6.8 percent. The legislation is projected to provide $25 billion in debt relief for students in the next five years.

During the past month, legislators from both parties have tried to address both short-term problems stemming from the expiration of the subsidies and long-term problems such as the national trend of increasing student debt and its effects on the economy.

The final bill passed focuses mainly on the short-term problem of interest rates, and some leaders of the U.S. House of Representatives have questioned the long-term effectiveness of this solution.

“The bill helps reduce costs to students and families, but it does not solve the long-term student debt crisis,” said bill proponent Rep. George Miller, D-Calif., in a press release.

UC officials and students also worry that loan debt may become unsustainable when economic conditions improve and Treasury bill rates start to increase.

“In the long term, accounting for inflation, loans will become more expensive for prospective Berkeley students,” said Rachelle Feldman, director of the UC Berkeley Financial Aid and Scholarships Office.

She suggested variable interest-rate loans and income-sensitive repayment programs as changes to the student aid program, as they would better adapt to changing economic conditions.

Alex Lee, a senior at UC Berkeley, has relied heavily on federal Stafford loans since he started college and will continue to do so. He said that he has no way of paying for college other than loans.

“I’m essentially at the mercy of the student loan system,” Lee said. “Once I get out, I’m pretty much screwed.”

Undergraduate loans for the coming year will drop to 3.86 percent, and graduate student rates will be 5.41 percent. PLUS loans, which are offered to graduate students and the parents of undergraduates, will drop to 6.41 percent. All of these rates will be lower than the current fixed rates of 6.8 percent for Stafford loans and 7.9 percent for PLUS loans.

The bill will also establish rate caps to prevent student loans from becoming too expensive — 8.25 percent for undergraduates, 9.5 percent for graduate students and 10.5 percent for PLUS loans.

Contact Dennis Vidal at dvidal@dailycal.org.

The post Obama signs student loan reform, ties interest rates to Treasury note appeared first on The Daily Californian.

With the downturn of the economy as well as rising academic and living costs, students increasingly rely on debt to finance their tuition and daily expenses. In fact, according to the Federal Reserve Bank, the estimated total student loan debt is $870 billion, which recently surpassed total nationwide credit-card debt ($693 billion) as well as total nationwide auto loans ($730 billion) for the first time. On average, American college students owe over $25,000 in student loans, which is more than twice the amount of a decade ago.

A lack of financial knowledge induces ill-informed decisions, leading students to accumulate unnecessary debt. Thus, this increases default rates and creates an undue burden on students, society and the overall economy as students are increasingly being forced to begin adult life deeper in debt, delaying or preventing them from buying a car, purchasing a home or starting a family. To break this vicious cycle, it is essential for students to be educated early in financial literacy.

Some are skeptical of the power of financial education. However, programs aimed at young adults have also shown signs of success. For example, national savings campaign America Saves, found that — after taking advantage of classes, counselor meetings and program materials — three out of four participants in a Cleveland-based program enacted a savings plan and progressed toward their goal.

Some argue that it is the financial industry, not consumers, that needs improvement. However, improvements to these two market participants are complements rather than substitutes for one another. Despite the passing of consumer-friendly measures such as the Dodd-Frank Act of 2010, which created the Consumer Financial Protection Bureau, and the Credit Card Act of 2009, which required greater disclosures on credit-card statements, the Obama Administration has also released its own financial literacy program in 2012, increasing the number of high schools that adopt financial education programs.

Nonetheless, more needs to be done. Overall, research shows that increased financial literacy can increase government revenue from tax collections, mitigate rising debt levels and increase societal productivity. Given the high costs of financial illiteracy, schools and governments should immediately increase their investment in developing creative solutions to the issue of financial literacy — particularly at high school and college levels — to alleviate present social and financial concerns.

A finalist in the new category of Financial Literacy added to the Big Ideas@Berkeley Contest this year, Cashify provides a sustainable business model for a fun and engaging social platform and a series of exclusive events that empowers students with the financial knowledge and long-term access to relevant resources necessary to make informed financial decisions. This innovative and grassroots effort to enhance financial literacy is a project, among many others, that students, schools and the government should further support.

To learn more about Cashify and to find out about how you can take action in improving financial literacy, please reach out to me, Cashify’s project lead.

Shuonan Chen is a UC Berkeley senior and an instructor for UGBA 198, the DeCal for Money Management Coaching.

Contact the opinion desk at opinion@dailycal.org.

The post Why financial literacy matters appeared first on The Daily Californian.

Student loan debt is on the rise, according to a report released Nov. 27 by the Federal Reserve Bank of New York.

In its Quarterly Report on Household Debt and Credit, the bank announced that outstanding student loan debt has increased to $956 billion in the third quarter of the 2012 fiscal year — an increase of $42 billion from the previous quarter.

“One reason (student loan debt) has risen is that states are still under enormous fiscal pressure to cut state funding, which means that tuition and fees continue to rise,” said UC Berkeley professor of public policy Robert Reich. “That in turn requires that students take out more debt.”

Of the $42 billion rise this quarter, $23 billion came from new debts while $19 billion came from previously defaulted upon student loans.

But the report may be somewhat misleading because it lumps private loans and federal loans together, according to Pauline Abernathy, vice president of the Institute for College Access & Success. Private loans, provided by private lenders like commercial banks, are a riskier way to pay for college than federal loans, which include benefits like flexible repayment options for students and debt forgiveness programs, Abernathy said in an email.

Despite rising student debt levels, Reich said going to college is still a sound investment for students.

“The lifetime earnings of college graduates are still 50 to 60 percent higher than the lifetime earnings of someone with just a high school degree,” he said. “There’s no question that, for good or ill, a four-year college degree continues to be the gateway to good-paying jobs in America.”

Contact Andy Nguyen at anguyen@dailycal.org.

The post Student loan debt on the rise, says report appeared first on The Daily Californian.

The findings of the report, published by the Consumer Financial Protection Bureau, included that student borrowing from private lenders “rapidly grew” from $5 billion in 2001 to $20 billion in 2008, followed by a “precipitous” decline to less than $6 billion in 2011.

Private lenders, the report states, “loosened” their approval standards during the period of national economic growth when private borrowing increased. The percentage of private loans made without approval from the students’ schools increased from 40 percent to 70 percent between 2005 and 2007. During that same period, private lenders were more likely to lend to students with lower credit scores. These changes, according to the report, “made private student loans riskier for consumers.”

Shortly after the beginning of the recession, in 2008, defaults on student loans rose dramatically. Today, 850,000 student loans have defaulted, representing a cumulative $8 billion. Although the report acknowledged that an increase in defaults may be part of the recession, it also said these defaults may be related to “over-borrowing and the level of subprime credits in cohorts like 2007.”

Even though comparisons were drawn to a mortgage crisis that had international economic implications, officials from the Bureau focused on the impact of the lending on students.

“The impact of the economy is that many are facing high debt burdens. Many say that is preventing them from saving up for a home and other economic milestones,” said Rohit Chopra, student loan ombudsman at the Bureau.

A relatively small amount of students — 14 percent undergraduate and 11 percent graduate — take out private loans to finance their education. Most draw first from the over $97 billion in subsidized and unsubsidized loans offered by the federal government every year, according to a report by the College Board. Federal loans offer special protections for students including subsidized and fixed-interest rates, deferment options, forbearance and income-based repayment. Some have said that students are not aware of these special protections offered by these loans.

The UC advises undergraduate students to maximize other resources, including federal loans, before seeking out private loans, warning that they may reduce eligibility for free or lower-cost federal, state or school-based student financial aid.

“We have data that shows at the height of the market, students were not taking out as much as they could in loans”, said Matthew Reed, program director at the Institute for College Access and Success.

Reed said that in one of the institute’s reports it was found that students and parents reported that they assumed they did not qualify for loans or did not understand the difference between fixed and variable-rate loans.

“It is clear that there is misinformation in taking out private loans,” Reed said.

The Bureau enumerated several policy recommendations in the report, including ensuring that students are properly informed of their loan choices before they sign a promissory note. Some of these recommendations include requiring certification of private loans — whereby loans would be approved by educational institutions — before disbursement and the creation of a centralized system where public and private loans can be compared side-by-side.

In the last four years, private lenders have tightened up their lending standards. In 2011, over 90 percent of private student loans were co-signed, an increase from 67 percent in 2008. Nine out of 10 private student loans for undergraduates in 2011 required that the school certify the student’s need for financing. Credits score checks have also increased with stricter criteria for approval.

Two of the largest private lenders for education, Wells Fargo and Discover, responded to the report by pointing out the relatively small portion of student debt that comes from private loans and the protections that both lenders have in place to protect consumers. Both organizations said private loans offer variable interest rates at a competitive rate because of a current low-interest rate market.

“We support the education secretary’s call for resources to build a comprehensive picture of the student loan landscape that included both private and federal student loans for a more accurate picture of the challenges that need to be addressed,” said Discover spokesman Jon Drummond.

The post Report compares private student loans to subprime mortgage crisis appeared first on The Daily Californian.

Let’s start with the good news. On June 29, Congress reached an agreement to keep student loan interest rates at 3.4 percent, two days before they were scheduled to double.

Then there’s the bad news. Lost in the discussion and exposure of the interest rates was an equally pressing issue with disastrous and far-reaching consequences: The federal government is removing the six-month interest grace period for student loans, undergraduate and graduate, and will no longer cover interest on graduate student loans.

Simply put, this is not fair to students. It’s hard enough to get a job straight out of college. A bachelor’s degree often is not enough. Losing the grace period, however, is a huge disincentive to go to graduate school. Many students can’t support that kind of financial burden. We are already in debt from four years of college with increasing tuition; now we’ll have to pull out loans to cover our other loans.

It’s not right to change the rules in the middle of a race. Students and families made agreements — and now the government is coming in and breaching those agreements. At the very least, the change should not affect existing loans.

The whole situation seems shady and suspect. These changes took effect on June 1 but no fuss was made, nobody seemed to know it had happened. We wonder why the government was not more open about it and why it was absolutely necessary for them to do so in the first place.

Students should be talking about it. The government did not do a satisfactory job of informing the public, so, like everything else, it falls on the students to inform themselves and others. We should not let last week’s “victory” of interest rates not doubling cloud our perception. There are many more battles, and just because one went our way does not mean we should become complacent.

Higher education is supposed to be a big deal in the upcoming election. Show us. Talk about losing the grace period as much as not doubling loan interest rates. Put them on equal footing. Convince us you actually care.

The post Fall from grace appeared first on The Daily Californian.

The federal government will no longer be covering interest on graduate student loans, and will also remove the six month interest grace period included with these student loans. This government action retains changes made last summer, but took effect June 1 this year.

Angélica Salceda, external affairs vice president for the UC Berkeley Graduate Student Assembly, said that graduate students are no longer eligible to receive subsidized federal loans.

“Instead, graduate students can receive unsubsidized Stafford loans with an interest rate that accrues while they are still in school,” Salceda said.

These changes received little exposure in the past month, as lawmakers focused on preventing a sharp increase in the interest rates for undergraduate student loans. Congress passed a bill Friday that prevented the student loan interest rate from doubling.

The new restrictions were part of a compromise between Congressional Democrats and Republicans that prevented the interest rate for undergraduates from doubling.

Judy Heiman, a principal analyst for the California Legislative Analyst’s Office, said students can still apply for federal forgiveness plans, including one that forgives any remaining debt after the holder completes 10 years of public service.

“These new rules may influence some students’ decisions (to attend graduate school), but more often than not (they) won’t really be a determining factor,” Heiman said.

The rule changes also affect undergraduate students. Previously, students had a six month grace period after they graduated during which the federal government covered their interest payments. The new rules eliminate that grace period.

Students can still wait six months before making their first payment, but interest will begin accruing immediately after they graduate, and students will have to pay the interest without federal help.

Salceda stated that the rule changes will cause students to think twice before doing extra years of school.

“The elimination of the six month grace period will only pile up further debt on already cash-strapped students who are trying to find jobs during the struggling economy,” Salceda said. “Each month that passes, starting from day one after receiving a diploma, students will be thinking about all the interest that is accumulating.“

The new rules have left many graduate students worried about paying for their education.

“I have relied on subsidized loans to fund my studies,” said Sonja Diaz, a juris doctor candidate at the UC Berkeley School of Law, in an email. “Despite being eligible for federal subsidized loans for almost a decade of my UC education, I will no longer receive this type of financial support as I enter my last year of law school; at a time when I need it most.”

The post New federal rules affect loan payments for graduate students appeared first on The Daily Californian.

In the months leading up to the expiration, Democrat and Republican leaders largely agreed on the necessity of maintaining the current 3.4 percent interest rate, but differed on how to generate the $6 billion in subsidies needed to maintain the reduced interest rates to keep rates from doubling for more than 7 million students with Stafford loans.

President Barack Obama and college students around the country have campaigned to push for congressional action to stop the increase.

“We’re pleased that the Senate has reached a deal to keep rates low and continue offering hard-working students a fair shot at an affordable education,”  reads a statement issued by the White House Office of the Press Secretary on Tuesday. “Higher education has never been more important to getting a good job.”

If Congress does not pass the Stop the Rate Hike Act of 2012 by the end of the month, rates will double to 6.8 percent for students with Stafford loans. The bill still needs to be voted on by Congress by the July 1 deadline.

“We hope that Congress will complete the legislative process and send a bill to the President as soon as possible,” the statement reads.

Adelyn Baxter is the news editor.

The post U.S. Senate reaches deal to keep student loan rates low appeared first on The Daily Californian.

According to Obama, a cut in federal Stafford loan interest rates that Congress passed in 2007 is scheduled to expire July 1. If Congress does not pass the Stop the Rate Hike Act of 2012, which maintains the current 3.4 percent interest rate, by the end of the month, rates will double to 6.8 percent for the more than 7 million students with Stafford loans.

In April, Congress came to a gridlock between two different bills that would generate the $6 billion in subsidies needed to maintain the reduced interest rates — Democrats favored a bill that would generate money from cutting subsidies for oil companies, while Republicans favored a bill that would generate money from repealing a program from the country’s new health care plan.

Obama has been visiting college campuses to call on students to email, call and tweet lawmakers into action. He started a #DontDoubleMyRate Twitter campaign, through which people have been mobilizing to tell Congress to keep student interest rates reduced.

Earlier this month while visiting University of Nevada, Obama told students low student loan interest rates should be Congress’s priority in maintaining affordable higher education.

“The number one thing Congress should do for you … is to stop interest rates on student loans from doubling at the end of the month,” Obama said in his speech. “The clock is running out. You know, in today’s economy, higher education can’t be a luxury. It’s an economic necessity. Everybody should be able to afford it.”

UC spokesperson Dianne Klein said in an email that the university is also doing its part to keep the interest rates low.

According to Klein, more than 76,300 UC undergraduates received subsidized Stafford loans in 2010-11, and if the bill is passed, these estimated student borrowers could save approximately $1,000.

Klein said UC President Mark Yudof has written letters regarding the bill to Obama, Senator Dianne Feinstein, D-Calif. and all 55 members of the California congressional delegation.

“It is critically important that the federal government work together to keep borrowing costs low for students and their families,” Yudof said in the letter to Feinstein. “I urge you to take action to ensure that the interest rate on subsidized Stafford student loans does not double from 3.4 to 6.8 percent on July 1, 2012.”

Derek Zhou, president of Berkeley College Republicans, said the organization supports the bipartisan effort to extend current loan interest rates and gave his perspective as a UC Berkeley student.

“On behalf of myself, I think spending in education is certainly a good thing — the question is whether the money is always used effectively,” Zhou said.

Campus CALPIRG Treasurer Spencer Pritchard said the organization has been advocating for continued low interest rates as well.

Pritchard said the organization held a campus event on Valentine’s Day asking Congress members not to break its heart by doubling student loan interest rates. Since then the organization has sent out hundreds of student petitions and been to press conferences with Congresswoman Barbara Lee,  D-Oakland and Senator Barbara Boxer, D-Calif., to put pressure on Congress.

“Personally, I have these loans, and (the increase) will make it harder for me to pay off my loans,” Pritchard said. “It could affect my debt and make it harder for me to start other things in the future like buy a house … I think all students understand that you don’t want to be in a bind.”

The post Obama, students push Congress to prevent student loan interest rate increase appeared first on The Daily Californian.

Jason DeFillippo/Creative Commons/Courtesy

President Barack Obama is pushing for college students to be more aware of, and have easier access to, income-based repayment of student loans.

In a presidential memorandum issued Thursday, Obama directed Secretary of Education Arne Duncan to streamline the process for income-based repayment plans and improve Internet resources for loan repayment options and debt management services.

The memorandum states that the income-based repayment plan for federal loans currently caps student loan payments at 15 percent of former students’ current discretionary income, and the cap is set to lower to 10 percent in 2014.

“More individuals than ever before are using student loans to finance college,” Obama states in the memorandum. “While a college education remains an excellent investment, this debt can be overly burdensome, especially for recent graduates during the first few years of their careers.”

The memorandum directs Duncan and Commissioner of Internal Revenue Douglas Shulman to streamline the online application process for the payment plan that allows student loan borrowers with federal loans to import their Internal Revenue Service income data directly into the application. Currently, borrowers must first contact their loan servicers before applying.

According to the memorandum, the average student debt after leaving college is $26,300. UC spokesperson Dianne Klein said in an email that the average debt for graduates across the university is about $17,000.

In addition, the memorandum directs Duncan to ensure that information and notifications about the plan be made easily accessible on the Internet, even when accessed from mobile devices.

“People need help, they want clear answers and they want good information, and we’re absolutely committed to providing them with that,” Duncan said in a Wednesday conference call.

During the conference call, Director of the White House Domestic Policy Council Cecilia Munoz said that while Obama administration is working to improve higher education across the nation, individual states and colleges must also do their parts to ensure students can receive affordable educations.

“Even in a dire fiscal environment like this, states can not simply cut their higher education budgets to balance their budgets and expect institutions to make up the difference by raising tuition,” Munoz said. “Colleges have to also act with creativity and urgency to contain costs, and they must hold themselves accountable for ensuring that students get an education that prepares them for success in the workplace.”

Klein said in the email that UC students generally borrow at manageable levels and have strong job prospects after graduation, reducing the need for income-based repayment plans.

“We support the President’s effort to help students learn about — and take advantage of — the Income-Based Repayment plan (IBR) for federal student loans,” Klein said in the email. “IBR can make loan repayment more manageable for students in jobs with lower salaries, or for students with particularly high levels of student debt.”

Although UC campuses already make borrowers aware of income-based repayment plans, the sign-up process is currently complicated and too dependent on the individual companies that service the loans, according to Klein.

“The President’s proposal would provide students with better information about IBR and, more importantly, make it easier for students to get into the program,” Klein said in the email.

Christopher Yee is an assistant news editor.

The post Obama calls for improvements to student loan repayment plan appeared first on The Daily Californian.

Valentina Fung/Staff

A massive crisis is quietly building with rapidly burgeoning student college loans caused by equally snowballing increases in college costs: the inability of indebted college students to marry and raise children after graduation. Yet there is an answer to this problem.

As noted in a recent article in the Wall Street Journal, student loans taken out to pay for college costs now exceed $1 trillion nationally! And, as also noted in the article, these loans are preventing former students from undertaking the costs of marriage and, even more, bearing and rearing children.

A friend’s grandchild and her husband — both college graduates — have incurred together a total of over a quarter of a million dollars of debt. They have monthly payments exceeding $2,000. How can they or those like them finance a family?

Recent demonstrations by students at Fresno State and the University of California speak loudly of the terrible burden that the increases of tuition and fees are placing on the shoulders of our youngsters.

So what is the answer? To partially forgive a student’s loan when a child is born and to do so for each subsequent child as well. There is precedent for this in the student loan program already: If a student works for either a nonprofit or a government entity for 10 years,  then his remaining federal student loan balance will be canceled on eligible loans. So why not extend this to having children?

There is also precedent for favoring  children in the U.S. Every time a child is born, a person gets an additional exemption on his income tax, thereby reducing his tax burden. Additionally, we have created tax-favored educational saving accounts and have shielded children up to age 26 by allowing them to be on their parents’ medical policies.

And such child-friendly policies abound in other nations. France has created a superb system of free or low-cost child care centers subsidized by the government to ease the burden of working mothers. Finland gives every mother a full year’s leave of absence (unpaid) with the right to return to her job. Many nations actually give a cash subsidy upon the birth of a child.

Why is this loan forgiveness important? At a minimum, those with college loans should have the ability to rear a family as well as all other members of society. Why should we single out those with loans to inhibit them from starting a family?

And I would argue that such individuals are the ones we want most of all to have families. They have shown the willingness to dream of the future, to strive to improve themselves and, by extension, their society. Who else would be better chosen to replace our aging population with new gifted and motivated children than this multicultural, multiethnic lower- and middle-class group?

How would this work? For each child a woman bore or person adopted, he or she would receive a partial per percentage credit on his or her student loan. The same would be true for each subsequent child. Perhaps the fourth child could wipe out the loan entirely. A reduction per child would partially compensate for the increased cost of the child. I would extend the partial forgiveness to legally married spouses, since they are the ones additionally burdened with the legal obligation of support.

Since their legal obligation is less clear, cohabiting spouses would be barred. This would strike a blow for reinforcing traditional marriage, which has been losing ground in the U.S.

We are facing a barren landscape where our most educated young people are heavily burdened with loan payments, inhibiting them from starting a family when they are the ones who hold the future of all of us in their hands. It is time to address this problem by giving relief and support to them.

Phil Fullerton is a resident of Fresno.

The post Loans present threat to families appeared first on The Daily Californian.