In October, President Obama initiated an executive order to reform student loan policy. Obama’s two-part plan will enable borrowers to consolidate government loans and the plan will accelerate the existing student loan reform program Congress passed in 2010, which was originally scheduled to take effect in 2014.
The 2010 income-based repayment plan reduced the amount college graduates have pay towards their federal debt balance from 15 percent to 10 percent of their annual discretionary income. According to this plan, all remaining debts will be forgiven after 20 years, instead of the current debt expiration of 25 years.
The income-based repayment plan would allow borrowers who earn less than 150 percent of the poverty line ($16,335 for a single borrower, $33,525 for a family) to have a loan repayment of zero.
The White House estimates 1.6 million borrowers are eligible for Obama’s accelerated income-based repayment program, also called the “Pay as You Earn” proposal. To qualify for the income-based repayment program, borrowers must have taken out a loan during or after 2008 and one in 2012.
Eric Sims, assistant professor of economics at Notre Dame, said that the policy has “some potentially adverse consequences.”
“By capping loan repayments at a relatively small fraction of income,” he said, “it punishes those who make a lot of income, and therefore discourages trying to earn more.”
According to Sims, Obama’s policy will affect some students’ career choices.
“By effectively reducing the lifetime burden of student debt, it changes incentives for the kinds of majors people do and the kinds of careers they pursue,” he said. “Basically, it incentivizes going into lower income fields/majors. I’m not saying that’s a good thing or a bad thing, but that’s one thing that it will do.”
Obama’s loan reforms will also allow those who obtained both a loan from the Federal Family Education Loan Program and a direct loan from the government to consolidate them at an interest rate of, at most, 0.5 percentage point less.
This consolidation could be available to 5.8 million borrowers. However, students who graduated in 2011 or earlier will not qualify.
The consolidation will not be available to students who obtained private loans in lieu of government loans.
Students who attend expensive colleges and universities, like Notre Dame, often must commit to private loans in addition to government loans. As a result, such students may be less affected by recent loan reforms.
“Essentially this means that the government would be refinancing these loans for people at very low rates,” Sims commented. “This could potentially have a stimulating effect on the economy in the short run… high debt burdens are encouraging people to spend less, which is in turn reducing aggregate demand and employment. A plan that lowers the burden of debt might encourage more spending. Of course the flip side of this policy is that it will hurt private lenders.”
More than 36 million Americans have federal student loan debt, and the nation’s student loan debt will exceed $1 trillion this year. Americans now owe more for student loans than for credit cards, according to the Federal Reserve Bank of New York and the U.S. Department of Education. The average debt for a college graduate is $24,000, with 10 percent owing $40,000 or more.
“This student loan relief will be a great help to graduates all over the country and to the economy,” commented Notre Dame Senior Jonathan Macklin. “If all your hard work is not just getting sucked up by student loans, you’ll have more money to pump back into the economy – it just makes sense.”
Notre Dame Junior Blakey Wilkins said, “Young Americans and first-time voters were instrumental in [Obama's] 2008 election victory and these are the people now who are finding themselves unemployed and protesting at Occupy Wall Street. Obama’s plan definitely helps his re-election prospects.”
Stephanie House is a senior who likes the color purple, dining hall bananas, and playing violin on the beach. Contact her at firstname.lastname@example.org.
Derek Defensor is a sophomore who won this semester’s MVP award for the politics section. Contact him at email@example.com.