Will Obama's student loan plan really help?
The president's new plan to ease student loan debt is getting mixed reviews from bloggers and students.
When I graduated from college back in the dark ages, my student loan payments were $51.26 a month. I think I remember the number exactly because it was an important line item on my post-college budget. After graduating, I moved back in with my parents until I found a full-time job six months later.
Today's graduates with student loans are in a different position -- facing payments of about $330 on an average debt of $27,204. In fact, U.S. student loan debt now exceeds the country's credit card debt.
On Wednesday President Obama announced a plan to ease the student loan burden for millions of borrowers with programs to lower monthly payments and consolidate loans, in addition to accelerating changes scheduled to take effect in 2014 through a law passed by Congress last year.
The new plan's major components:
- The income-based repayment program ("pay as you earn") will cap payments at 10% of borrowers' discretionary income. (The current program caps payments at 15%, and last year's law would have set the cap at 10% in 2014.) This could impact as many as 1.6 million Americans.
- Unpaid debt will be forgiven after 20 years of payments (compared with the current 25) -- another change originally planned for 2014.
- The plan's loan consolidation program will allow borrowers who have at least one federal student loan and one federally guaranteed private loan to consolidate the loans and reduce their interest rate by as much as half a percentage point, potentially helping 5.8 million borrowers. Post continues after video.
Shortcomings of the plan
Those most likely to be affected are borrowers in low-paying jobs with large debt. But, wrote a blogger at NonTradLaw:
Most of us aren't deciding whether to ... buy food or pay student loans. But there are huge numbers of graduates who are burdened significantly enough that they are unable to live normal lives; they can't afford to start families, they can't afford to move to more expensive cities to take a better jobs, they can't buy houses (or even move out of their parents' houses), they have no health care and aren't saving a penny for retirement, they can't buy anything that helps the rest of the economy recover, etc.
- It's not enough. "The monthly impact of the president's new effort for most Americans paying off college debt will be between $4 and $8," The Atlantic says.
- The new income-based repayment plan will only benefit new borrowers, Mark Kantrowitz noted on The New York Times' The Choice blog:
Recent college graduates, for example, will not benefit. Instead, the new income-based repayment plan will be available to new borrowers since 2008 who have at least one loan that originated in 2012 or later. Borrowers with loans from 2007 and earlier will not be eligible. Likewise, borrowers who don't have at least one loan from 2012 or later, like students who graduated in 2011 or earlier, also won't be eligible. Borrowers who are already in repayment will not be eligible.
- The plan will have no effect on millions of graduates who have private student loans.
- Borrowers already in default on student loans will not benefit.
- Unlike other types of debt, student loans cannot be forgiven in bankruptcy, and the new plan doesn't change that.
Loan debt reflects rising costs
One reason my loan debt was so low was that college simply cost less. Tuition for a full class load in my first year at the University of Washington was $229 per quarter. A new report says in-state college tuition at four-year public schools averages $8,244 a year, up 8.3% from 2010.
This chart in The Atlantic shows student loans have grown by 511% since 1999, while disposable income has increased by only 73%.
Tuition is increasing across the board, but public university students are feeling it most. As The New York Times reported:
This is the fifth consecutive year in which the public universities that serve most students raised their tuition at a faster rate than the far more expensive private universities. And over the last three decades, the report found, the average tuition at four-year state universities almost quadrupled.
More on MSN Money:
Well I think that tuition is outrageous, even at the community college level. I think that the Government should not GUARENTEE student loans anymore. Privitize this such as an insurance policy. That is an unrealistic burden to place on those who don't utilize the student loans in the first place. See people aren't forced to attend college, and in turn aren't forced to take out student loans. They do this freely, and banks should either give the loan or not. Insurance companies should be the insurers, not the Government. Tax incentives can be given to companies for extending grants as well as those whom give to the colleges of their choice. Wouldn't it be a great society if no one had to worry or be burdened with paying for an education? But we don't live in such a society.
So when you consolidate loans, why are they still considered "Federal" loans? The Government doesn't consolidate the loans, banks do.
Keep in mind that Obama said his plan "WILL CARRY NO ADDITIONAL COST TO THE TAXPAYER". His plan calls for (1) Reducing the maximum repayment to 10% of discretionary income annually and (2) any remaining debt would be forgiven after 20 years. The definition for discretionary income: The amount of income that is left for spending, investing or saving after taxes and personal necessities (such as food, shelter,clothing, insurance and transportation have been paid. Let's start with a $40,000 student loan and a $40,000 annual salary and $10,000 annual discretionary income. The interest on the loan @ 6% is $2,400 per year and the borrower only has to pay 10% of their discretionary income ($1,000) so after year one their loan is now $41,400. Keep in mind that at the end of 20 years the remaining loan will be forgiven. Since this plan will be no cost to the taxpayer I can only assume the Tooth Fairy will pay the remaining loan.
Unlike federal loans (even the unsubsidized ones) the interest rate is not regulated at all (mine are at 11.99% and many are higher) and as of 2005 they are treated the same as federal ones with regard to bankruptcy and collection powers of the lender. However these loans are for substantially higher amounts and do not have the benefits accorded to federal loans, such as easy forbearance, consolidation and income based repayment just to name a few. They are treated as any other unsecured debt except with regard to bankruptcy; this is wrong and gives lenders no reason to work with a borrower as they (the borrower) have no recourse.
Regardless of what "facts" people through around, there is not nor has there ever been a high incidence of bankruptcy fraud regarding student loans (or anything else for that matter) and the 2005 Bankruptcy Act gives lenders too much power and borrowers way to little. I do not advocate bankruptcy and people should pay back what they borrowed (I pay mine), that said there is a reason that we have and need bankruptcy protections. Student loans owed to a bank need to be treated as any other non-secured debt; student loans owed to the government should be treated as any other government debt. Anything else simply isn't just.
Please read the article before rushing to make such bitter comments, comparing yourself to others, you sound like uneducated people yourself. Nowhere in the article talks about paying somebody's bill. The cost of education is way too high even in the public universities (remember education is a “non-profit” entity) and that the plan, in simple words, suggests consolidating the student loans, lowering their interest rates, and implementing some type of income-base program.
So should those graduating from high school, sit around and wait for things to get better or, unless absolutely sure they are going to get a job after four years in college to then go get an education? Many of you want to preach about responsibility when the only responsibility they have at the time, is to go to college, study hard, and get a degree. Society has taught us that education is important that it opens the door to many opportunities, that through education you can make a decent living and be a good contributor to this society.
I pay my way in life too, it has not been easy. I graduated from college in 1999, I was working full-time while studying part-time and had to take student loans to pay for college that I will be done paying in 2016. But I am also aware that times were different then, and thank goodness I have always have a job and been able to pay my loans but firstly, THANKS to my EDUCATION.
Education should be affordable, student loans should have a lower interest rate, and given more time to start payments, 12 months or as soon as you get a job whichever happens first. I don’t agree with total forgiveness of a student loan as the protesters are demanding it is an extreme demand but would get something done, forgiveness is not going to happen so calm down, stop been so bitter, and attacking those pursuing an education.
I'm not saying that's always the case...just in most cases
I KNOW nightrite is kidding.
I thought there had to be mathematical calculation of loans on the ability to repay. Stupid me.
Federal education loan charges us 6.1% intrerest, this is outrageous and much like theft,while banks are paying 1% on savings.
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