Obama to announce plan to reduce monthly student loan payments
Concerned over increasing student debt that has now eclipsed the nation's credit card debt, Obama administration officials say they'll act to lower monthly payments on federal student loans that begin after Jan. 1.
On Tuesday, Secretary of Education Arne Duncan said President Obama today will announce his plan to accelerate income-based federal loan repayment rate reductions by two years, to 2012. The administration also will offer students and graduates with direct government loans and government-backed private loans an opportunity to consolidate payments and get an interest break of about 0.5 percent, Duncan said.
"College graduates are entering one of the toughest job markets in recent memory, and we have a way to help them save money by consolidating their debt and capping their loan payments. And we can do it at no cost to the taxpayer," Duncan said, suggesting that costs will be offset by money the government saves on administrative costs it pays private lenders.
The announcement is the latest in a series of executive actions the president hopes will help put Americans back to work and strengthen the economy.
Economist Richard Vedder, director of the Center for College Affordability and Productivity, a Washington think tank, said the plan fails to address the roots of the student debt crisis and is an unlikely candidate to create any kind of stimulus.
"I don't find this to be particularly constructive. I see it more as a political ploy. ... The only thing I can think of is (Obama) is trying to score political points," Vedder said.
Student debt has made headlines in recent months as student loan defaults rose to 8.8 percent in 2010 from 7 percent in 2009, while unemployment rates among recent college graduates 24 and younger climbed to 9.4 percent, the highest it's been for that group since 1985. The national jobless rate in September was 9.1 percent.
In Pennsylvania, where nearly three of four new college graduates had outstanding college loans in 2009, the Project on Student Debt estimated the average debt was $27,066. Nationally, total student debt could top $1 trillion by the end of the year, according to consumerreports.org.
Student debt has been a hot topic with Occupy Wall Street protesters as well as with about 30,000 people who signed an online White House petition asking the administration to take action to ease repayments.
Jeff Cech of Greenfield, a member of Occupy Pittsburgh, the local offshoot of Occupy Wall Street, said he struggles to pay his rent and $300 a month on his student loans from his income from a warehouse job he found after he was laid off from a news job at Metro Networks in 2008.
A 2007 Duquesne University graduate with a master's degree in journalism and media arts, Cech isn't sure how the changes will affect him.
"There are a lot of people who are struggling to pay off their loans who have been struggling for a long time, and it doesn't seem like it will help them at all," he said.
Administration officials concede the plan offers no relief for those in default on student loans.
But Duncan estimated that about 6 million borrowers paying on multiple loans may be able to save hundreds of dollars a month by consolidating in 2012. And 1.6 million new borrowers may be eligible for lower repayment rates when the maximum income-based repayment on such loans falls to 10 percent of discretionary income, down from 15 percent, and loan forgiveness kicks in at 20 years rather than 25 years.
Vedder said the easy availability of federal loans has contributed to growing debt and soaring college tuition rates.
Vedder also said the availability of federal loans has not increased the affordability of a college education for the nation's poor. He said 12 percent of college graduates came from the bottom 25 percent of income earners in the early 1970s, compared with 7.2 percent in the past decade.
While Vedder dismissed the administration's plan, others hailed it and new efforts to promote the income-based repayment plans that became available in 2010.
Only about 450,000 borrowers are taking advantage of income-based repayment, while millions more who owe more than they earn are eligible, Duncan said. A White House website posting said more than 36 million Americans have federal student loan debt.
Author Mark Kantrowitz of Cranberry, publisher of the online financial aid sites Fastweb and FinAid, estimated as many as 5 million to 6 million borrowers may be eligible for income-based repayment plans under the existing law. He speculated many borrowers simply are not aware of the law that allows for income-based repayment if a borrower's outstanding debt exceeds annual income.
"There are a lot of people in extended (student loan) repayment plans who don't realize they could probably get lower monthly payments," Kantrowitz said, adding that for many, repayment would amount to less than 10 percent of their income even under the existing income-based repayment plan.
"It is the people who are experiencing the greatest financial distress who should look into this. It will yield the lowest monthly payment. For most, it will be less than 10 percent of gross monthly income, probably around 5 to 6 percent of gross monthly income. That is an affordable monthly payment," he said.
Vedder, however, argues that the government should not be in the student loan business.
"Our biggest mistake was getting involved as a nation in lending money to students," he said.