What Do Obama's Student Loan Reforms Mean for You?
With higher education costs skyrocketing and student loan debt set to top $1 trillion by the end of 2011, America hasn't exactly felt like the land of opportunity for college grads, even though 60 percent of future jobs will require more than a high school diploma. President Obama told a packed house today at the University of Colorado at Denver that the government "should be doing everything we can to put a college education within reach" of everyone. To that end, he plans to fast track reforms for student loan repayment and consolidation.
Instead of waiting till 2014 to roll out the new "Pay As You Earn" plan—which will cap the amount graduates must pay on their loans at 10 percent of their discretionary income—students will be able to take advantage of the plan next year. After 20 years of repayments, the plan will forgive the balance of a borrower's debt.
Obama also said he plans to make consolidating federal student loans easier for about 6 million students and recent grads. Instead of "writing five different checks to five different lenders," he said, borrowers will only have to pay one lender per month and will likely have a better interest rate.
While the income-based reform is a step in the right direction projected to help around 1.6 million students, Radhika Singh Miller, a program manager for educational debt relief and outreach at the nonprofit Equal Justice Works, notes it will only benefit students who are starting college next year or later. "For those of us who've already borrowed and are buried in student debt," she says, the plan offers no help.
The good news, Miller says, is that the consolidation reforms will "help a lot of borrowers," who may have loans that are guaranteed by the government but issued by private banks. Interest rates for those loans vary widely, so being able to combine them at a lower rate will "make a big difference in what you're paying." Graduate students in particular, she says, rack up lots of loans and, between moving and other life transitions, may miss a payment without realizing it. If you only have one payment to keep track of, says Miller, you have a better chance of avoiding default.
But none of the reforms will reduce the total amount you owe, and they won't affect loans borrowed directly from a bank to help with college expenses. "People still need to be proactive about avoiding those private loans," she says, because they aren't eligible for income-based repayment plans or consolidation. If you don't, you're really "at the mercy of a private lenders. All the things you see that come with federal loans—like deferments and forebearance—aren't standard with private loans." If the Obama Administration put some consumer protections back into the private loan industry, Miller says, that would help millions.
Ultimately, Obama says he hopes the changes will leave Americans more money to buy homes, save for retirement, and "give economy a boost at a time when we desperately need it." Sounds like a noble cause to us.