President Obama will offer some relief to borrowers trying to pay back student loans. A measure passed by Congress to limit repayments to 10 percent of discretionary income — down from 15 percent — will go into effect in 2012 instead of 2014. The remainder of the loan will be forgiven after 20 years instead of 25. In addition, the new plan offers a small cut in interest rates for students who consolidate their federal loans.
Some 1.6 million borrowers could save hundreds of dollars a month, predicted Education Secretary Arne Duncan. “These are real savings that will help these graduates get started in their careers and help them make ends meet,” Duncan said.
The Education Department offered two examples of the new form of income-based repayment, known as Pay As You Earn.
A nurse who is earning $45,000 and has $60,000 in federal student loans. Under the standard repayment plan, this borrower’s monthly repayment amount is $690. The currently available IBR plan would reduce this borrower’s payment by $332 to $358. President Obama’s improved ‘Pay As You Earn’ plan will reduce her payment by an additional $119 to a more manageable $239 — a total reduction of $451 a month.
A teacher who is earning $30,000 a year and has $25,000 in Federal student loans. Under the standard repayment plan, this borrower’s monthly repayment amount is $287 . The currently available IBR plan would reduce this borrower’s payment by $116, to $171. Under the improved ‘Pay As You Earn’ plan, his monthly payment amount would be even more manageable at only $114. And, if this borrower remained a teacher or was employed in another public service occupation, he would be eligible for forgiveness under the Public Service Loan Forgiveness Program after 10 years of payments .
Few borrowers are enrolled in the income-based repayment plan now, possibly because they’re not aware it’s available.
The White House said the changes won’t cost taxpayers more. I have a hard time understanding why collecting less money over a longer period of time and forgiving loans after 20 years of minimum payments can be cost free.
Trying to grow the economy by encouraging Americans to borrow is a risky strategy, writes David Magee on International Business Times. “Student loans are needed, as they are an important tool for many who could not otherwise afford an education. But they shouldn’t be a tool for growing or fixing the economy.”
Update: U.S. House Committee on Education and the Workforce Chairman John Kline, a Minnesota Republican, said Obama’s changes will encourage more borrowing. “That means more debt for students, more debt for taxpayers, and more red ink on the government’s books.”
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at 6:46 am
[...] Obama plans to ease student borrowers’ repayments by accelerating a measure limited repayments to 10 percent of discretionary income and offering a [...]
at 9:01 am
I’ll just wager a guess here and say that few people use the income-based repayment plan because it greatly increases the interest paid over the life of the loan. Obama’s plan seems like it would just encourage even more young people to borrow beyond their means, and it would do nothing to encourage universities to be more cost-efficient.
at 5:36 am
[...] guess the new, improved Pay As You Earn would help by limiting payments to 10 percent of her above-poverty income for 20 years. In fact, [...]