Both Republicans and Democrats are working hard to fix a flawed Federal student loan system as a July 1 deadline approaches that would see interest rates doubled from 3.4% to 6.8%. The rate was cut in half in 2008 as the recession hit and the increase is a return to its previous level.

But the current interest system is problematic because the rates are fixed and not tied to the market. It’s a difficult balance for legislators to work out a system that’s sensible and cost-effective without being too friendly or too punitive to borrowers, and there’s common ground between Republicans, Democrats and the President on solutions.

As the legislative efforts continue, a bill has been introduced in the Senate to freeze interest rates at 3.4% for 2 years as a solution is forged — but the funding to continue high Federal subsidy for loan interest will come from :

The Student Loan Affordability Act of 2013 (S. 953) would freeze need-based student loan interest rates for two years while Congress works on a long-term solution to slow the rapid accumulation of student-loan debt, and is fully paid for by closing three egregious tax loopholes.  Specifically, the bill would: limit the use of tax-deferred retirement accounts as a complicated estate planning tool; close a corporate offshore tax loophole by restricting “earnings stripping” by expatriated entities; and close an oil and gas industry tax loophole by treating oil from tar sands the same as other petroleum products.

Student loan debt, which has topped $1 trillion in the United States, is behond only mortgages for total consumer debt, having outpaced credit card debt and automotive loan debt. Research by FICO Labs showed that the average student loan debt in 2005 was around $17,000, and in 2013 that number grew to over $27,000 for an increase of nearly 60% in 7 years.

The bill would also draw funding from closing a tax loophole in individual retirement accounts. As Sen. Patty Murphy’s (Democrat, Washington State) office explains:

Under current law, holders of IRAs and 401(k)-type accounts are required to begin taking taxable distributions from those accounts once they reach age 70-1/2.  However, a loophole in the tax law allows taxpayers to stretch those distributions over many years if they leave their account to a very young beneficiary.  When the account holder dies, the taxation of the account is then delayed as it is spread over the life of the beneficiary.  The Student Loan Affordability Act would require the retirement savings accounts to be distributed within five years of the death of the account holder, unless the beneficiary is within ten years of the account holder’s age, an individual with special needs or disabled, a minor, or the account holder’s spouse.  This provision saves taxpayers approximately $4.6 billion over ten years.

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As an increasing number of people in the United States struggle with managing student loan repayment, the US Department of Education has announced a plan to make payments more affordable. The ‘Pay As You Earn’ repayment plan will allow those under the weight of student loans to repay at a rate that is capped based on their income.

Borrowers who qualify will have their payments capped at 10% of their discretionary income, with the Department estimating that 1.6 million borrowers could reduce their payments if they qualify.

Income-based repayment, which allows borrowers to pay 15% of their discretionary income, is already used by ~1.3 million. Those who do not qualify for ‘Pay As You Earn’ still may qualify for income-based repayment.

According to the Department, the move will especially help those in public sector employment.

Most borrowers are able to repay their student loans, but for many who are struggling – including teachers, nurses, first-responders and others in lower-paying public service careers – these income-driven plans could reduce monthly payments to help ensure that borrowers are able to manage their debt and avoid the negative consequences of defaulting on their student loans.

The Department admits that these repayment plans will result in borrowers paying more interest, but reducing the burden of repayment, especially in the first years after college, will provide an overall benefit and safeguard against defaults.

With a growing number of options for repayment, the Department of Education has created a suite of tools to help compare repayment options and select the one that best fits an individual’s circumstances. The tools are available at StudentLoans.gov.

More general information on the responsibilities that come with government student loans and information on managing finances is available at StudentAid.gov.

Easing the burden on student borrowers was a pledge made by President Barack Obama and Secretary of Education Arne Duncan throughout Obama’s first term. With questions over student loan interest rates, grants, and the overall future of federal financial aid for higher education, policies governing student loans developed slowly. Income-based repayment and ‘Pay As You Earn’ are small steps toward the President’s stated commitment of making higher education more affordable.

“We know many recent graduates are worried about repaying their student loans as our economy continues to recover, and now it’s easier than ever for student borrowers to lower monthly payments and stay on track,” said U.S. Secretary of Education Arne Duncan.

In the last year, student loan debt in the United States has eclipsed the $1 trillion mark, as well as overtaking credit card debt. The average debt burden carried by a graduate of a 4-year school is ~$26,000.

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When Michele Fitzgerald lost her job and the ability to repay the education loan she took out to finance the education of her daughter Jenni, she did something unusual. She became a so-called boomerang mom. Unable to survive in any other way, she moved in to Jenni’s townhouse and allowed her daughter to cover the majority of her living expenses.

This is an unusual situation, and a reversal of the one that has become increasingly familiar since the unemployment rate for recent college graduates tanked in the wake of the 2008 financial crisis. Yet, according to CNBC, as parents take on an ever greater chunk of debt to put their children through college, the resulting fiscal insolvency could put an increasing number of children in the caretaking position over their progenitors.

At 35, Jenni could be legitimately counted as a success. After graduation, she was able to land a well-paying job in public relations and has already begun to pay down some of the student loans that were taken out in her name. Her mother, at 60, isn’t quite so lucky. And she is not alone.

There are record numbers of student borrowers in financial distress, according to federal data. But millions of parents who have taken out loans to pay for their children’s college education make up a less visible generation in debt. For the most part, these parents did well enough through midlife to take on sizable loans, but some have since fallen on tough times because of the recession, health problems, job loss or lives that took a sudden hard turn.

Parents finding themselves under the weight of debt problems are also much less vocal than students who are in the same situation. Through the work of activists like the Occupy Movement, students’ loan problems are well documented and widely discussed. Those plaguing parents like Michele remain mostly in the shadows.

“You don’t want your children, much less your neighbors and friends, knowing that even though you’re living in a nice house, and you’ve been able to hold onto your job, your retirement money’s gone, you can’t pay your debts,” said a woman in Connecticut who took out $57,000 in federal loans. Between tough times at work and a divorce, she is now teetering on default.

But just because it isn’t public doesn’t mean the problem isn’t growing. The proportion of people over 60 who are holding a loan and are more than 90 days overdue has jumped to nearly 10% this year from 6% in 2005. There are also growing numbers of people holding federal loans who are getting their Social Security checks garnished for repayment. There were only 23,996 such garnishments recorded in 2001. This year, there were nearly 120,000.

The federal government does not track how many of these older borrowers were taking out loans for their own education rather than for that of their children. But financial analysts say that loans for children are the likely source of almost all the debt. Even adjusted for inflation, so-called Parent PLUS loans — one piece of the pie for parents of all ages — have more than doubled to $10.4 billion since 2000. Colleges often encourage parents to get Parent PLUS loans, to make it possible for their children to enroll. But many borrow more than they can afford to pay back — and discover, too late, that the flexibility of income-based repayment is available only to student borrowers.

Although shouldered mainly by parents, these kinds of problems also affect their children. As one man who earned two bachelor’s degrees with the help of loans taken out by his mother explains, he feels incredibly guilty by the financial burden he put on her — so much that he feels “paralyzed” by his reluctance to discuss it with her.

In another extreme case, crushing debt load was mentioned in a suicide note of a step-parent of one recent law school graduate.

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Jill Stein, the Presidential candidate from the Green Party, isn’t projected to have a significant impact this November, much less win the election. Many guessed that she understood that fact herself when they heard of her promise to offer free higher education to everyone in the country once she’d taken the oath of office in January of 2013.

She made the pledge during the third-party debate hosted by Russia Today earlier this week. And she didn’t stop at free tuition. She called on the federal government to ”bail out” all outstanding student loans. She said that young people carrying loan balanced after graduation were “indentured servants” barred from fully participating in the economy and the entire country is the worse for that.

“Every generation, the economy needs to be rebooted by fresh imaginations and by the fresh genius of a new generation,” Stein said. “That doesn’t happen when a generation is locked into being indentured servants. That’s what our students are now. We need to bail them out and create free public higher education.”

Justice Party candidate Rocky Anderson said he agreed with Stein, though he stopped short of calling for “free” higher education.

“We cannot afford not to provide a great education and  equality of opportunity for all of our young people in this country,” Anderson said. “We need to insist on prosperity, not austerity.”

According to Red Alert Politics, Anderson closely echoed the words of Vice President Joe Biden who said in 2009 that as counter-intuitive as it is, the government should be looking to spend money to get the country and itself out of bankruptcy.

Stein continued using references to forced labor as she expanded on her student bail-out idea. Those who hold the IOUs – the federal government in this case – should use that power to free the students from bondage. She also encouraged those young people feeling let down by the current government to “surge” to the polls this November and vote for free education and, presumably, for Jill Stein.

“There’s a famous saying from Alice Walker: The biggest way people give up their power is by not knowing we have it to start with. In fact, there are 90 million voters who are not coming out to vote in this election,” she said. “I want to focus especially on those 36 million students, and young people, and recent graduates who are effectively indentured servants because of the high unemployment rate, and the draconian, unforgiving loans that have been customized especially for students lacking any consumer protections.

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Although heavy student loan debt is on the minds of young people in the run up to election day, their main criterion for choosing which candidate to vote for seems to be who will do the most to shrink unemployment in the next four years. Generation Opportunity, a non-profit dedicated to raising the proportion of voters between the ages of 18 and 29, has been canvassing the political and social views of young Americans — and their data shows that the way the 18-29 demographic assigns importance to issues is quite different from conventional wisdom.

Paul T. Conway, who heads up Generation Opportunity, says that while politicians are playing up what they will do to lower interest rates on student loans, college students and graduates appear to care more about landing a full-time job after leaving school than saving a few points on their loan balances. They want to be reassured that after investing a lot of money into a college degree, they will have the opportunity to become independent and be able to plan for the future.

It is also heartening to find out that, for the most part, young voters aren’t interested in the government lending a helping hand, but rather want access to better job opportunities so they have more control over their own fate. Many don’t mind high loan balances as much as they mind the fact that they might not get into a position that would allow them to repay.

“This generation is very savvy – they are used to customizing everything from their coffees to their iPhones and do not appreciate the lack of choice in the most significant issues they face: planning for their future and building a career. The more politicians avoid discussing details on how they will get government out of the way of full-time job creation and reverse record high youth unemployment, the more politicians are viewed as either disingenuous or completely out of touch with the day-to-day concerns of young Americans. It should come as no surprise that young people don’t believe their interests are being represented in Washington and plan on making their voices heard in the presidential election in November.

Fueling their concerns are recent studies that show both a growth in student loan balances and a decline of opportunity for college graduates. Data collected by Project on Student Debt at The Institute for College Access & Success indicates that the loans carried by an average graduate this year went up by more than $1,000 from last year to an average of $26,600. At the same time, research out of Rutgers shows that only about 51% of recent college grads are currently employed full-time — a combination of factors that substantially alarms the Millennials as they prepare to go to the polls this November.

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The latest figures from the Institute for College Access and Success, a California-based non-profit, are alarming. They show that nearly two-thirds of college graduates who finished college in 2011 left school carrying student loan debt in the amount of – on average – $26,600. Furthermore, some are saying that the true numbers are actually worse, since the TICAS report, released last Thursday, doesn’t include loan information from for-profit universities where students tend to carry higher debt loads than their counterparts at non-profit schools.

Another year of student loan growth is particularly worrisome in light of the state of the employment market faced by recent college grads. Although the unemployment rate for college graduates has been holding steady at 4.4%, among 2011 graduating class, nearly 8.8% remain unable to land a job.

Still, those who have higher education certifications are still in a better position than those who attempted to enter the workforce right out of high school. The unemployment rate for people looking for a job while holding only high school credentials is a staggering 19.9%

However, TICAS President Lauren Asher points out that even with increasing tuition and growing debt, the overall return on investment in a college education remains good.

“In these tough times, a college degree is still your best bet for getting a job and decent pay,” said Asher. “But, as debt levels rise, fear of loans can prevent students from getting the education they need to succeed. Students and parents need to know that, even at similar looking schools, debt levels can be wildly different. And, if they do need to borrow to get through school, federal student loans, with options like income-based repayment, are the safest way to go.”

That might seem not at all obvious to the one-third of graduates who already made the investment and are now working jobs that did not require college-level expertise. Although he didn’t make clear all the related details, Governor Mitt Romney’s assertion that more than 50% of college graduates were unable to to land jobs was also somewhat correct. According to the Northeastern University’s Center for Labor Market, data shows that 53.6% of college graduates holding bachelor’s degrees under the age of 25 were employed in positions that didn’t make full use of their degrees.

As for those who have no job at all, according to Georgetown the latest monthly unemployment figure for college graduates under age 24 is 10.5 percent (the figure typically jumps each spring as a new class graduates and declines over the course of the year; last March it was 5.4 percent).

“Increasing student debt in a weak economy can be a knock-out blow to many considering college,” said Rich Williams, higher education advocate with U.S. Public Interest Research Group, which advocates for students. “As our economy is recovering, lawmakers must send every signal that college is a good investment. “

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The Minneapolis Star Tribune reports that Minnesota is the home to some of the most indebted college graduates in the country, according to a document released earlier this week. California-based Institute for College Access and Success has published a paper that ranks Minnesota third in the country for the amount of debt carried by its students, writing that an average student from a MN four-year college carries nearly $30,000 in education loans upon graduation.

Minnesota’s students just might appreciate free, high-quality education — but the state won’t allow it.

A survey of 2011 graduates shows that they are leaving school carrying $26,600 debt load, on average, which is an uptick of 5% from the year before. And many believe that the true picture is even more dire, since the report includes only the balances carried by graduates from non-profit schools.

The state also clocks in near the top for the percentage of students taking out student loans, with 71% resorting to loans to finance their education. It is also a home to two of the schools that made the institute’s “high-debt colleges” list. A typical student graduating from Minneapolis College of Art and Design has a loan balance of $43,035, and those getting their education from College of St. Scholastica in Duluth leave with debt totaling, on average, $41,282.

Thursday’s report is the latest to document the steady swelling of student loan debt that has provoked protests from parents and policymakers

At the same time as the institute’s debt report was making headlines, those in Minnesota who are experimenting with different approaches to bringing down the price of college education were dealt an unexpected setback when the state’s Office of Higher Education sent out a notice to Coursera, a pioneering online education provider, that it must stop offering its services to students in Minnesota.

The reason behind the move? A decades-old law that says that colleges and universities must have permission from the state to offer classes within its borders.

The move led Coursera to clarify its terms of service to exclude those who wish to avail themselves to the hosted content but reside in Minnesota. The new terms ask students to agree that they will not take any Coursera massive online open courses if they either live in the state or spend a substantial amount of time there.

George Roedler, manager of institutional registration and licensing at the Minnesota Office of Higher education, clarifies that his office’s issue isn’t with Coursera per se, but with the universities that offer classes through its website. State law prohibits degree-granting institutions from offering instruction in Minnesota without obtaining permission from the office and paying a registration fee. (The fee can range from a few hundred dollars to several thousand, plus a $1,200 annual renewal.) That means that it’s Stanford, Columbia, Michigan, the University of Melbourne, et al. that are violating Minnesota law by partnering with Coursera to offer courses that Minnesota residents can take for free.

Roedler goes on to explain that the law is in place to prevent students from wasting money on a degree from a non-accredited institution. He remained unpersuaded by the argument that this can hardly occur in Coursera’s case as all the content through their website is free and it is not a degree-granting institution.

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In an effort to get a handle of the problem of student loan default, the U.S. Department of Education has published its report on three-year student loan default rates for the first time.

According to the data, the three year rate of student default for the Fiscal Year 2009 was 13.4%, a decrease of .4% from the pilot report published last year. The report finds that for-profit private universities had the highest rate of student loan default at 22.7%, while at public institutions the default rate was 11%. Private non-profit schools produced the lowest rate of default at 7.5%.

In a statement accompanying the release, U.S. Secretary of Education Arne Duncan said that the new data was collected and published as part of the effort to reign in the student loan problem plaguing students and colleges. In addition, the numbers will also allow the government to hold schools that show high year-after-year default rates accountable for their results. If a high number of students at a particular school default at greater-than-average rates, it could signal that the school leaders are not being responsible in their efforts to minimize the loan burden on their graduates.

The Department is in the process of switching from a two-year cohort default rate to a three-year measurement as required by the Higher Education Opportunity Act of 2008. The national two-year rate rose to 9.1 percent for the FY 2010 cohort, from 8.8 percent in FY 2009.

The provision was included because it provided a better view of the problem, since many stop paying off their student debt beyond the original two-year window. This is especially true with for-profit colleges where a large percentage of graduates continue to make payments until the third year.

The two-year cohort default rates (CDRs) announced today represent a snapshot in time, with the FY 2010 cohort consisting of borrowers whose first loan repayments came due between Oct. 1, 2009, and Sept. 30, 2010, and who defaulted before Sept. 30, 2011. More than 4.1 million borrowers from nearly 6,000 schools entered repayment during this window, and almost 375,000 defaulted for an average of 9.1 percent.

When releasing the new report, the DOE also announced that two schools will be sanctioned this year due to having a student two-year loan-default rates in excess of 25% for the third consecutive year: Centro de Estudios Multidisciplinarios in San Juan, Puerto Rico and Tidewater Tech in Norfolk, Virginia. Unless they manage to bring down default rates, they could be disqualified from accepting federal student aid funds.

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The combination of grant reduction and rising tuition has put many Texas college students in a difficult position: worrying how to meet their student loan debt obligations. With the fall semester kicking off in universities across the state, those in college now will find themselves upon graduation carrying much larger loans than student from as recent as five years ago.

To combat this problem, the editorial board of the Houston Chronicle calls on the Senate Higher Education Committee, which is scheduled to meet this week, to set a goal to reduce the Texas students’ dependence on student loans in order to afford their degrees. As part of the effort, legislators should increase the funding for both grant-aid and work-study programs, as well offer students an opportunity to obtain free or low-cost financial counseling before they take on a financial burden they are unable to discharge.

Texas college students, like the rest of the country, are racking up college debt. Nationally, combined student loan debt has surpassed the $1 trillion mark, outpacing credit card debt. With decreases in state financial grant aid, students are relying more on loans and off-campus work to cover their college expenses, forcing them to take fewer classes so they can work more hours, slowing time to graduation and leaving many students with insufficient income to cover these obligations. While student loans can provide a pathway to graduation, too much loan dependence can lead to unmanageable debt.

It is in the interest of any state to increase the quality of its workforce, and making it easier to afford a college education is one step in the process that would do just that. College graduates not only out-earn their high-school graduate peers, but they are also less likely to be unemployed, to resort to public assistance and even to get sick. Over the last several decades, Texas has experienced a real baby boom — the state now has one of the largest proportion of school children in the country. While this should be a positive development and sets the state up to develop a vibrant future workforce, nearly two-thirds of kids who are currently enrolled in Texas public schools come from low-income families.

Without any changes, this means that very soon, a large proportion of high school graduates won’t have the financial wherewithal to afford to go to college — unless they take on a massive amount of debt.

Policymakers in Texas like to tout low tuition at Texas community colleges as the best financial aid program in Texas, yet community college students living near or below the poverty level still face a shortage of between $3,000 and $5,400 annually to pay for the total cost of attendance. These figures are even higher for students at four-year institutions. And our student loan default rates are soaring. Of those students at Texas’ public two-year institutions who entered loan repayment in 2008, 19.6 percent defaulted within three years. Borrowers at four-year public institutions fare better, but the rate is still too high at 9.2 percent.

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The initial version of IBR capped the loan repayments of students who were up to date on their loans, to 15% of their discretionary income. An amendment, passed in 2010, lowered the cap to 10% for those students who took their loans out after July 1st, 2014. Then, in November, 2011, President Obama, by executive order, expanded the pool of students who qualify for the new lower IBR cap to include some who have taken out loans in 2012. The sequence of rapid changes left some unsure about the impact they would have on their own student loans.

IBR is aimed at helping college graduates whose income-to-debt ratio is too low. Previously, students who thought they might qualify under the IBR rules had to apply to their loan servicers to determine their eligibility. This will change in the fall on 2012, when these decisions will shift to the Department of Education, where those seeking to enroll in the program can apply directly. Those seeking guidance can use the IBR calculator available on the DOE website.

The DOE blog post has a list of frequently asked questions about Income-Based Repayment to assist those who wish to find out about the program in more detail. For example, those who wish to find out if their marital status will effect their IBR eligibility, especially if their spouse is carrying loans as well, will get guidance on how to take their financial changes into account when estimating IBR eligibility:

If you are married and file a joint federal tax return with your spouse, both your income and your spouse’s income are used to calculate your IBR monthly payment amount.

If you are married and you and your spouse file a joint federal tax return, and if your spouse also has IBR-eligible loans, your spouse’s eligible loan debt is combined with yours when determining whether you are eligible for IBR. If the combined monthly amount you and your spouse would pay under IBR is lower than the combined monthly amount you and your spouse are paying under a 10-year standard repayment plan, you and your spouse are eligible for IBR.

They can also see what their monthly payments are expected to be under IBR and get advice on how the lowered discretionary income cap will effect them once in goes into effect.

The FAQ is a great resource to guide students’ decisions when it comes to enrolling in IBR.

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