Federal Reserve Chairman Jerome Powell said Thursday that rising student loan debt could be a drag on economic growth going forward.
Powell, the top U.S. monetary policymaker, also questioned why educational debt can’t be thrown out under current bankruptcy rules.
His remarks in testimony before the Senate came just days after the Department of Education announced it was seeking public comment on modifying the “undue hardship” standard. Currently, the standard offers few borrowers student loan relief in bankruptcy.
Burgeoning education debt could slow growth
While Powell’s overall remarks before the Senate Banking Committee suggested the Fed has a positive economic outlook over the next several years, the chairman warned that ballooning balances on student loan debt could pose problems for economic growth.
“It absolutely could hold back growth,” Powell said in response to a question on student debt. “You do stand to see longer-term negative effects on people who can’t pay off their student loans. It hurts their credit rating. It impacts the entire half of their economic life.”
There are currently 44.2 million Americans with student loan debt who collectively owe $1.48 trillion. Powell acknowledged that there’s no current data to project the effect of student indebtedness. But he cautioned that the effects of so much debt spread among so many borrowers could pose a macroeconomic risk.
Powell stressed the importance of making sure that students understand the obligations they’re taking on. But he also voiced his support for the idea that Americans must be able to borrow to invest in their future.
A hint to Congress to act on bankruptcy rules
Powell touched on the challenges student debtors face in filing for bankruptcy.
Currently, an undue hardship standard applies. And it requires students to prove they have exhausted all options to try to repay student loan debt. Students must also be able to prove they’re unable to make payments while still maintaining a reasonable standard of living.
Almost no students can meet this standard. For those who do, the process of suing the government to get student loans discharged is prohibitively expensive.
Powell questioned the current policy. “Alone among all kinds of debt, we don’t allow student loan debt to be discharged in bankruptcy,” he said. “I’d be at a loss to explain why that should be the case.”
While the Department of Education is considering modifications to the undue hardship standard, only Congress can make binding changes to bankruptcy rules.
What does this mean for you?
While the Federal Reserve influences the economy by setting interest rates and controlling monetary supply, the central bank is unable to directly help struggling student loan debtors.
“This is fiscal policy, this is something for you, not something for the Fed,” Powell told Congress.
Policymakers have struggled to address the student loan debt crisis, with proposals ranging from passing a student loan refinance bill to incentivizing employers to provide student loan repayment assistance.
These initiatives have been unable to garner the bipartisan support necessary to gain traction. Despite broad agreement that change is necessary, continued conflict over the best approach to the student loan debt crisis could be making legislative action difficult.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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