Excessive Student Loan Debt
Whatever your politics may be, if you have student loan debt then President Obama’s student loan forgiveness program could be a major boon to your financial footing. In October of 2011, President Obama’s program was announced to a cheering crowd of students at the University of Colorado’s Denver campus who had good reasons to be happy as he likely just saved them tens of thousands of dollars each.
Virtually all modern college graduates come out of school with massive debt, with recent surveys placing the average student loan debt at $23,300 in 2011. Alarmingly, a study by the Federal Reserve Bank of New York recently revealed that more than 10% of students owed more than $54,000, and 3% of them actually owed more than $100,000.
Everyone can agree that these are debt levels even seasoned working professionals would have trouble paying off, but strapping them on the backs of recent college grads seeking their first jobs in the current economy creates a recipe for financial disaster (via widespread defaults). You’d think we learned our lesson from the Housing Crisis in 2008, but I digress…
Reforming Student Loan Debt Relief
Fortunately, President Obama’s new student loan forgiveness plan attacks this problem with a multi-pronged approach to providing effective debt relief, and as such it’s been celebrated by virtually everyone, including some of his political opponents.
In the President’s own words, the reason for pushing this program was that “Student loan debt has now surpassed credit card debt for the time ever… and when a big chunk of every paycheck goes towards stuent loans instead of being spend on other things, that’s not just tough for middle-class families, it’s painful for the economy and it’s harmful to our recovery because that money is not going to help businesses grow.”
Whether you think this program will help businesses grow or not, and whether you agree with President Obama’s political views, here are the major tenets to his new federal debt forgiveness program:
President Obama’s “Pay As You Earn” Plan
Reductions in Monthly Payments
Previous federal student loan law stated that grads had to pay 15% of their discretionary income in loan repayments each month, which crippled some people with an impossible financial situation that left them with far too little money left over for rent, utilities and other necessary living expenses, especially during the recent recession.
Under Obama’s new forgiveness program, monthly student loan repayments are being reduced from 15% to 10%, which may not sound like much, but is actually an enormous deal to those saddled with excessive student loan debt, as that 5% could make the difference between going hungry or falling asleep with a belly full of food each night.
This part of the plan, however, is not offered to everyone with student loan debt, but only to those individuals with student loans that are part of the federal Stafford, Grad Plus, or Perkins Loans programs. If you have a student loan via Sallie Mae, Chase, another private banking institution or some other financial entity, then unfortunately this benefit doesn’t apply to you.
Earlier Student Loan Forgiveness
Previous federal law provided a provision stating that student loan debt via federal programs would be completely forgiven after 25 years, but few borrowers were even aware of this option. President Obama and Congress passed a law in 2010 to help further reduce the burden on former students by reducing the complete debt forgiveness timeline to a period of 20 years, significantly increasing graduates ability to get out from under crushing federal student loan debt, but this change wasn’t set to take place until 2014.
Under President Obama’s student loan forgiveness program, the timeline for complete debt forgiveness of federal student loans has been pushed up to being first available in 2012, allowing an estimated 1.6 million former students access to earlier debt relief.
New Debt Consolidation Options
The third major tenet of Obama’s new student loan forgiveness program is to help reduce the confusion and logistical problems that many with student loan debt currently face. According to a study by his administration, they found that an estimated 5.8 million people were managing a Direct Loan (DL) and Federal Family Education Loan (FFEL) at the same time, making separate payments to the different accounts, which made the process more difficult, more time consuming, and more likely to lead to defaults.
Under President Obama’s changes to federal student loan law, the new plan allows borrowers to consolidate their student loan debt into a single account, making a single monthly payment to a single lender for both loans. Furthermore, the plan offered borrowers who take advantage of the new debt consolidation option to receive up to a 0.5% reduction in their interest rates on qualifying loans, meaning lower monthly payments and perhaps tens of thousands of dollars of savings over the lifetime of those loans.
Debt Relief for Start-Up Entrepreneurs
In coordination with President Obama’s student loan forgiveness program, the U.S. Small Business Administration announced that it take part in the White House-led Startup America initiative to help walk young entrepreneurs through the process of reducing their monthly student loan payments. Additionally, the Young Entrepreneur Council’s private sector Gen Y Fund announced it had committed to investing at least $10,000,000 in up to 100 startups headed by millenials, including promising to pay down remaining federal student loan debt obligations for the same entrepreneurs over the next three years.
Additional Public Service Benefits
One under-publicized portion of the President’s recent changes to student loan forgiveness includes a provision that reduces the number of years those entering public service jobs have to wait until their loans are forgiven. While previous law stated that graduates with federal student loan debt had to serve 20 years in public service positions, but the new provision reduces that requirement by a full 10 years, making public service jobs significantly more attractive to those graduating with excessive levels of student loan debt.
Obama’s student loan forgiveness program only applies to certain borrowers with eligible loans, so just because you have student loan debt doesn’t mean that it will necessarily help you. Qualifications for eligibility include:
- Borrowers must have taken out loans in 2008 or later, and who also take out a new loan in 2012 or later
- You must have at least one federal loan from the government (a direct loan) and one loan that originated with a bank (a guaranteed) loan
- If you have a private student loan, you may not qualify for this program
- Your student loans cannot be in default
- Borrowers who are already in repayment are not eligible for this plan’s benefits
- Borrowers must meet salary-to-debt ratio conditions as determined by the IBR calculator
President Obama’s “Know Before You Owe” Project
Part of President Obama’s plan included an attempt to better inform potential borrowers of the dangers inherent in taking out student loans. Announced by his administration, the “Know Before You Owe” project, a collaboration between the Consumer Financial Protection Bureau and the Department of Education, released a Financial Aid Shopping Sheet that included a draft model financial aid disclosure form to help colleges and universities present financial aid information to their students.
The goal of this new project is to let students better understand the type and amount of financial aid that they qualify for, and to help them better compare aid packages offered by different institutions (both public and private). Furthermore, the form makes the total costs, and all of the risks of the student loans extremely clear, all before any student has enrolled in a program, by outlining total estimated student loan debt, monthly student loan repayments after graduation and any other costs not covered by the federal aid packages that the student qualifies for.
For more information on the Know Before You Owe project, please visit the Consumer Financial Protection Bureau’s page here: Know Before You Owe.
American society has always pushed higher education as an important step in becoming a respected, productive member of society. For generations, college degree programs have served the population well by providing a major driver of upward mobility that allowed people to move from the very bottom of the earning barrel through the ranks of the middle class and into incredibly lucrative careers.
Recent developments, including excessive increases to college tuition rates, extreme increases in the costs of college textbooks and torrents of recent college graduates entering an incredibly weak economy have significantly reduced the expected return on investment for the average college degree, but this program seeks to counter those changes.
President Obama’s student loan forgiveness plan could help remedy an impending financial disaster by preventing excessive debt from being racked up by future college graduates, and by giving those who are currently being destroyed by overwhelming debt an easier, more efficient way out of the downward spiral that they currently face.
The student loan debt crisis is real, and programs like these are just one potential solution, but how well will they actually work?
What Do You Think?
The right and the left have both weighed in on this plan, with relatively expected results (we are in an election year after all), but what do you think about it? Does President Obama’s student loan forgiveness program provide enough effective debt relief, or is it a band aid on a gaping wound? Is he right to offer this kind of support for college students, or should he stick to other policy objectives? Let us know what you think.