Casten, Davis, and Spanberger Lead Bill to Protect Struggling Student Loan Borrowers
Washington, D.C. - Today U.S. Representatives Sean Casten, Danny K. Davis, and Abigail Spanberger championed legislation to protect student loan borrowers experiencing financial hardship by stopping an onerous practice known as capitalization after a deferment or forbearance. The End Capitalization for Struggling Borrowers Act is included in the Democratic College Affordability Act to lower the cost of college and reauthorize the Higher Education Act.
Capitalization is an accounting rule which immediately adds the total interest accumulated to the cost to the total value of an asset, in this case the student loan. Here is how it works: Federal student loans offer borrowers experiencing financial hardship the ability to temporarily pause payments via deferment or forbearance. Rather than simply continuing to accrue interest, federal student loans add the entire amount of interest from an unsubsidized loan to the loan principle, often dramatically increasing the amount of the loan. If a student owes $20,000 and accrues $5,000 in interest and accepts forbearance after being laid off of a job, the capitalized interest creates the new loan balance of $25,000 that is 25 percent more expensive simply because the borrower used an option to help them at a difficult time. Given the amount of student loan debt and the increasing need for graduate education, capitalization can substantially inflate student loan debt and make it harder on borrowers to pay off their loans.
"When student loan borrowers get in over their heads, we should look for ways to help them get out, not bury them deeper," said Rep. Casten. "I'm proud to join Congressman Davis in introducing the End Capitalization for Struggling Borrowers Act. Our nation's $1.5 trillion in student debt makes it clear that our existing policies haven't done enough to make these loans affordable, and this bill is a meaningful step in the right direction."
"I have helped far too many borrowers who felt cheated because no one explained that accepting a temporary deferment or forbearance would dramatically increase their loan amounts," said Rep. Davis. "This practice creates confusion, distrust of the federal government, and crushing debt. The federal government should protect borrowers and help lower student debt, not take advantage of financial struggles."
"As growing student debt burdens continue to cripple Central Virginians' ability to buy a home, support a family, and save for retirement, the federal government shouldn't be seeking to profit off students through capitalized interest," said Spanberger. "Our legislation would stop this practice. By ending the capitalization of interest on these loans, we would increase transparency in the federal student loan process—and we would provide certainty to students who seek to defer payment on their loans, including those who choose to pursue graduate school. I'm proud to stand alongside Congressman Davis and Congressman Casten in introducing this legislation, and I look forward to advancing additional ways to tackle student loan debt for Central Virginia students and their families."