Skip to content

3Qs: Evaluating Obama’s student loan plan

Last week, President Obama announced a series of regulatory changes aimed at easing the burden of student loans for recent college graduates who may not be making enough money to repay their debts. Professor Jeffrey Born, a finance expert in the College of Business Administration, says while the changes may not help many recent graduates, they could help students who are preparing to graduate — especially those with degrees that may not net them high-paying jobs.

What sort of impact will these changes have on college students and graduates currently paying back their loans? Was last week’s announcement a surprise?

Two parts of the plan announced by President Obama could benefit graduates currently paying back their loans. First, cutting the maximum payback period for lower-income graduates from 25 years to 20 years, and second, providing an opportunity for graduates with loans to consolidate their loans into one (easier) payment with an additional sweetener of a 0.25 percent to 0.5 percent savings on interest rates.

However, most of the benefits will be obtained by future graduates who find work in relatively low-paying jobs and have a relatively high amount of loans. The White House estimates that 1.6 million students could benefit from the reduction in income levels dedicated to loan payments. Cutting down the maximum payment period won’t directly affect anyone for a couple of decades.

While many of the changes proposed by the president were set to go into effect in 2014, it did come as somewhat of a surprise that he has chosen to move the timetable forward.

What are some of the specific conditions that accompany the changes to federal student loan policies?

For current students, the president has moved the implementation of a reduction in the maximum amount of discretionary income that can be used for loan payments (15 percent down to 10 percent).  This reduction was to go into effect in 2014 and it will be made available to students who have taken on loans between 2008 and 2011, providing they take more loans in 2012.

There are tests to determine if one can have his or her loan payments capped as a percentage of income. Marriage and changes in income levels (through raises) can lead to an increase in payments — but never to an amount greater than what would be paid under standard terms offered other student loan borrowers. Remarkably few borrowers (450,000) have taken advantage of the Income-Based Repayment (IBR) plan to date.

Do you think this factors into the new “Occupy Wall Street” and the 99 percent movements? What role could policies like this have in the upcoming election?

Many in this movement appear to be recent graduates, and most of these changes will not directly help them. However, voters 18 to 29 years of age with some college experience appear to have supported the president by more than a 2-to-1 margin in the last election, and they voted more often than in recent elections. With the presidential election season already underway, it is unlikely that this will be the last policy announcement designed to help solidify and improve the president’s approval with this key constituency.