Student loan terms could soon be revised

Congressional leaders are moving briskly ahead on bills that would dramatically cut interest rates on student loans for some borrowers.

Although the measures have yet to become law, one has been approved in the House and a similar proposal has passed a key Senate committee. Experts say this is a sign that lending reforms are likely to be included in higher-education legislation that is expected this year.

That comes as welcome news to many former students including Delonda Graham, a 37-year-old healthcare worker from Knoxville, Tenn. Graham, the ninth of 10 siblings, built up $25,000 in college debt while getting a degree in sociology from the University of Tennessee.

When she didn’t get the high-paying job she’d hoped for after graduation, she deferred payment and then signed up for the Department of Education’s “income-contingent” repayment plan.

Now she’s used up all her payment delays and interest has accrued faster than she can pay off the debt. Her loan balance has ballooned to $48,000 during the last dozen years and she has no idea how she’ll ever get out from under it.

“It’s been a nightmare,” Graham said. “I will be dead and gone by the time these loans are paid off.”

Graham’s situation is illustrative of a disturbing trend, a rapid increase in the number of highly indebted college graduates, said Robert Shireman, director of the Project on Student Debt.

Since 1993, the number of students with more than $40,000 in debt -- an amount too great for most graduates to manageably repay in 10 years -- has soared more than tenfold.

In 2006, nearly 80,000 graduates were in Graham’s unenviable position, compared with less than 7,400 graduates who grappled with a similar amount of inflation-adjusted debt in 1993, according to the group’s research.

“Student debt has become a major finance concern for millions of graduates in the last couple of years,” said Luke Swarthout, higher education advocate for the U.S. Public Interest Research Group in Washington. “There are people who save for 18 years -- from birth to the moment their child goes to college -- and still the child ends up with loans that they’ll repay for another 10 years.”

Spurred by complaints and horror stories such as Graham’s, Congress appears poised to help students who have built up large amounts of college debt, Shireman said. However, exactly how legislators will address the problem remains unclear.

There are two approaches, Swarthout said.

The bill that passed the House of Representatives proposed a fairly simple solution. It would gradually cut interest rates for all new borrowers who had federally subsidized Stafford loans.

Stafford loans are the most common type of student loan. They come in two varieties -- subsidized and unsubsidized. With the subsidized loans, the federal government pays the interest while the student is in school and in periods of deferment. Generally speaking, these subsidized loans are provided to lower- and middle-income students -- those whose families earn less than $80,000 a year.

With unsubsidized loans, the interest is added to the loan balance for the student to eventually repay.

If this proposal were to pass, interest rates on new loans would be gradually stepped down to 6.12% in 2007; 5.44% in 2008; 4.76% in 2009; 4.08% in 2010; and 3.4% in 2011.

That would save about $4,000 for a student with $20,000 in debt, Shireman said.

But it wouldn’t differentiate between graduates who have the ability to repay their loans and those who don’t. Moreover, it would do nothing for former students such as Graham because it provides relief only on newly issued debt.

The Senate Education Committee has endorsed a second solution that would create a Fair Payment Assurance program that would apply to both new and existing student debt.

Under this program, borrowers earning less than 150% of the federal poverty level would have their loan payments deferred or reduced so that they would never exceed 10% of their total income.

After 25 years of repayment, any remaining debt would be canceled.

Debt forgiveness would be available earlier -- after 10 years of repayment -- for public-sector workers in emergency management, law enforcement, public health, education and social work.

Graham said this proposal could be a lifesaver.

Although she’s now earning $8.50 an hour working at an assisted-living facility, her loan balance ballooned when she was earning just the minimum wage.

Now her debt service is so crushing that she’s living at the YMCA, paying rent of $42 a week, to keep her head above water. A better car and homeownership -- attainable goals for most of her peers -- are a pipe dream.

“There is no way I can pay off $48,000 on $8.50 an hour,” Graham said. “I am 37 years old, I have a degree from a four-star university, and I am drowning in debt.”

Kathy M. Kristof welcomes your comments but regrets that she cannot respond to every question. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For previous columns, visit latimes.com/kristof.