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Home » Debt Management, Student Finances

Will Obama’s Student Loan Relief Plan Help you & Our Country?

Last updated by on April 12, 2015

We have a tuition inflation problem in this country. As a result, we have a student loan debt problem as well.

Student debt was higher than credit card debt for the first time ever in 2010 and will pass $1 trillion this year (5 times what it was just 10 years ago).

The average student today graduates with an average of $27,200 in debt and that number is quickly accelerating. 20 years ago, the average was just over $5,000, even after being adjusted for 2011 dollars.

In light of some of these troubling statistics, the Obama administration announced an executive order, called the “Pay as you Earn” plan, aimed to help Americans reduce some of their student debt burden.

The Obama Student Loan Relief Plan will:

1. Allow borrowers to cap their student loan payments at 10% of discretionary income.

Congress passed a measure to have an income-based repayment (IBR) plan, which allows student loan borrowers to cap their monthly payments at 15% of their discretionary income. The IBR plan is scheduled to reduce that limit from 15% to 10% of discretionary income. Obama is effectively making this reduction active as soon as 2012, instead of the originally planned 2014.

To determine your eligibility for an IBR plan, you can use the U.S. Department of Education’s IBR calculator to estimate whether you are likely to qualify for the plan. The calculator looks at your income, family size, and state of residence to calculate your IBR monthly payment amount.

2. Student loan forgiveness on remaining debt after 20 years (10 if in public service)

Any remaining debt would be forgiven after 20 years, instead of the previous 25 years. The White House predicts that about 1.6 million borrowers could be affected by this change.

Borrowers in public service occupations are still eligible for forgiveness under the Public Service Loan Forgiveness Program after 10 years of payments.

3. Provide a discount with consolidated loans

Obama’s executive order will also allow borrowers who have a loan from the Federal Family Education Loan Program and a direct loan (DL) from the government to consolidate them at an interest rate of up to a half percentage point less than their current rate and have only one loan payment instead of two. It is estimated that this could affect 5.8 million borrowers, according to the White House.

obama student loan relief

Will the Pay as you Earn Changes Benefit you?

Obama’s Pay as you Earn plan could benefit you if you are eligible and have trouble making your monthly student loan payments or could benefit from consolidating.

On the other hand, you should realize that you may actually end up paying more in interest by extending your payback schedule. The only difference between a 10 and 20 year loan is that you pay a hell of a lot more interest with the 20 year loan. Everyone’s situation is going to be slightly different and is dependent on your income, so you will have to crunch the numbers to see if this would make sense for you.

The Real Cause of Student Loan Debt Problems

This plan may help a bit for some individuals, but it does very little to address the cause of the problem – tuition inflation that is borderline criminal. This plan is the equivalent of a band-aid on a shotgun wound. Some of this inflation has been caused by the ease of the ability to take out high dollar student loans. If you are 18 years old, why worry about the high cost of the education if you can spread it out over decades? And surely that high price tag will give you a positive return on investment, right?

Since 1978, the CPI (consumer price index) has increased 3 times, while the cost of a 4 year degree from a private school have increased almost 10 times. Public universities haven’t fared much better. This past year, tuition at public universities increased 8.3%, double the rate of inflation. When wages are barely keeping up with inflation, the result is the problem that we have today.

More needs to be done to limit tuition increases. Why give any public aid to universities that raise tuition at rates over inflation? Why allow private universities to accept payments from federal loans if they raise tuition over inflation?

Something needs to be done or a college education will surely:

  1. be limited only to a wealthy few.
  2. destroy our economy as graduates will be saddled with debilitating debt for decades.

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I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 10,000+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • Matt says:

    Ugh, no. This will end up on the shoulders of the taxpayers. If you’re dumb enough to over-extend yourself then you probably didn’t get very much value from the education you paid out of the nose for and probably shouldn’t have been there in the first place.

    • G.E. Miller says:

      The administration claims taxpayers won’t shoulder any burden here. How? They say that they are cutting out the middle man on the loans, saving the government the money they were paying 3rd parties to originate the loans.

      • JC says:

        GE –

        You’re right. Ultimately the taxpayer will still be shouldering the burden for the loan pay-off the government would wind up doing if the student has not paid the loan within 20 (or 10, as the case may be) years. I believe the claim is that the amount of money the government is going to save from not offering subsidized loans to graduate students will pay for this initiative. It’s like robbing Peter to pay Paul…

  • Kolton says:

    You are right, this plan will not help or effect TOO many if tuition is jacked up more than inflation. I think you said it best when its like a band aid on a shotgun wound. The burden of that amount of debt, and with the tough job market makes the tuition investment more riskier than it used to be.

  • Natalie says:

    The stated reason for this plan is to encourage people to study in fields that need a lot of education but pay very little, like teachers, social workers, political scientists, some pure sciences, etc. I for one am helped immensely by this plan as my $50,000 college loan is difficult to pay on a salary of $35,000/yr. I expect to be one of the people who’s loan is forgiven after 20 years.

    If that’s what the plan will do, I support it. However I doubt that would be the effect. In my case, I received Pell grants to pay for about 90% of my tuition costs. The loans were for living expenses. I could have taken significantly less in loans and still finished school without a problem. I just would have been a little less comfortable with either free time or money. So it may encourage people to take more loans than they need.

    Because student loans are one type of debt you can’t escape through bankruptcy, it’s really comforting to know that I will never have to pay more than I can afford. I believe it to be fair in that sense. It may also encourage some more people to go to school, which would be great. I just wish they would tighten the loans up a little bit. It’s too easy to take out too much. I received $8000 (above tuition costs) in loans my last semester. That’s for three months!

    • Lynda says:

      So because you choose to be comfortable and not work as much as you could have and took out more than your needed (8K for 3 months? that’s about 5 months pay for an Army private by the way) the rest of us will have to suck up what you don’t repay. My kids are going to a community college and will transfer, they both work and they live at home saving about 24K a year. They have degree plans for what their prospective schools (prepared by those schools) will accept as transfer credits. They will each have to take around 67 credits. They will both work and we will take out as little in student loans as possible to get them through because they haven’t been raised on handouts and it shouldn’t be what they expect. I’m glad you were “comfortable” your last semester of school but I feel you are a drain on society and you and people like you will just continue to push this country toward bankruptcy. You can go to school without student loans (the exceptions for me is medical school, vet school, and law school) I worked 50+ hours a week, had 2 kids in diapers, a husband who was military and deployed and went to school fulltime. My GPA was a 3.87 and people like you are very offensive to those like me who worked our asses off and didn’t party, and didn’t become a drain on our society to “getover” because if you don’t pay your students loans that’s what you are becoming and doing.

      • patriot332 says:

        Lynda, Great response. You nailed it! You said it much more civilized than I could have! She (Natalie)is making 35k, not much considering the cost. she says “I expect to be one of the people who’s loan is forgiven after 20 years.If that’s what the plan will do, I support it.”
        She is all for it if she doesn’t have to pay it back. OMG WHO does she think PAYS? She doesn’t pay so the college has to raise the price. It is another giant Ponze scheme. And the worst part is that she will vote for Obama again because she owes him.

  • BG says:

    Why not go back to the old way of handling this matter: let a bankruptcy judge decide whether you can pay the debts?

  • Lindsay says:

    I’m a lot more willing to tolerate this as an approach if it’s just extended to people who already have mountainous loans, not to students looking to obtain them in the future. Here’s why:

    College education is a bubble market, just like the housing market was. The stark reality is that if you have basic computer skills, basic intelligence, and/or basic coordination, you are completely ABLE to do the vast majority of entry-level jobs. The college education does not make you qualitatively better at an entry level job. And if you spent two years at the entry level and two years at the second level, qualitatively speaking, you’re going to be BETTER able to do the third-level job than someone who spent those same four years studying a loosely-related field, a handful of requirements, and some electives. When you factor in the 5-7 years many are taking to finish college these days, the comparison is even more stark.

    There are DEFINITELY jobs that require higher-level abstract thinking and education, but let’s be honest–the overwhelming majority of tasks people do in a day they either knew how to do coming out of high school or have learned from their years on the job. Employers are only requiring college degrees artificially, not because they really indicate a worker has more value to add to the employer.

    Advertising and public opinion have radically inflated the value of a college education well past anything it actually offers, and the legions of unemployed college graduates are now facing the fact that they fell for a lie. Predatory lending practices fed the belief that college graduation, like home ownership, is worth going into debt for 15-30 years to achieve.

    But it isn’t. It just doesn’t actually offer what it promises. And the bubble is about to burst.

    By the time an individual gets to a level in his/her career where a college education might be necessary, A) They’ll take their studies a LOT more seriously than the average frat boy, and B) They’ll have had the opportunity to plan for it and the income to pay for it. They won’t be making the blind financial decision of a 17-year-old who’s always relied on Mom and Dad and has no concept of the pains of excessive debt. It will really add value for those who actually need it in their fields and pursue it later.

    So I really don’t think we have any incentive to extend decade or multi-decade loans to high school graduates to obtain degrees that don’t qualitatively make them more productive members of society. In many cases, college just adds 4-8 years of adolescence and irresponsibility to young people who’d be better served by entry-level work and learning to live within their means.

    • G.E. Miller says:

      Very well put. I think you’re right on. We’re already at the point where you need to have a masters in order to get the same benefits as a bachelor’s.
      These days you are almost better off financially to get an apprenticeship or associate from a community college in a high demand field, keep your expenses to a minimum, and retire as soon as possible instead of slaving away the rest of your life to pay off debt.

    • Kevinntx says:

      Interesting comments… Lindsay especially. Yes. I owe quite a bit in student loans, but the reason was so that I could go to school at time and a half to hurry through and get going with my career.

      Yes. There are many degrees that are bogus and mean little. However, it is not the degrees that are the joke, it is the information that is taught in the years before college. It is the continued depletion of content. It is the increase in social teaching focused on welfare, equal rights, and giving more to thos with less without an expectation of repayment for services rendered. Even illegal aliens can attend our schools, and we pay for them. When they are finished with high school, they become a burden to society, unless they are willing to accept the lower wages given those without an education.

      So, are we claiming that American Education, one of the first world’s most inept educational systems, one of the lowest in reading, writing and mathematics, is producing graduates at the high school level who are capable of performing any job above peanut counter?

      Please, for what we teach here in American high schools, most folks could just skip right to the test and graduate with a GED. The foundation of learning, unless you went to a rich high school, is college, and then on the job training. But most people could not survive in the corporate world of engineers, contracts, science and higher level thinking… not without a college degree.

      American pre-college education just doesn’t stack up.

      As to the loans, we are paying for those who go for the degrees paying out less income, paying for those who default and those who drop out. The problem is welfare. Tuition increases as a result of welfare, not inflation.

  • Smith says:

    I major problem that i see is people paying to much for higher end schools and taking feel good courses. If you choose a career that you love like Film, music and other such degrees that don’t offer a higher salary or earning potential why should your loan be forgiven? If you have to go to your dream school and not a community college again why should tax payers be on the hook for your education.

  • Elcobydos says:

    I am one of those people who took out big debt to go to college and I will be paying it back for a good portion of my life. I am currently employed and I majored in business and got an MBA. Don’t know how valuable it will be to employers in the future but I personally found that it was very valuable to me. I learned a significantly more in grad school than undergrad but I can see why some people feel that it’s not worth it. I’m not arguing about that. Everyone is entitled to their opinions.

    My issue is that I just don’t see how its fair for someone who is irresponsible enough to rack up thousands of dollars in credit card debt can be forgiven for it in bankruptcy, yet someone who decided to go to college for the betterment of themselves and to contribute positively to society (at least that’s why I went) cannot have their loans discharged unless they prove undue hardship.

    Don’t get me wrong. I think not paying back any loans is horrible and irresponsible but the message this sends seems to be that you can borrow a ton of money from the credit card companies to buy whatever you feel like it and you can walk away but if you borrow for education you are stuck with it the rest of your life no matter what your situation is.

    *Note* – I know some people rack up credit card debt for other reason then irresponsibility.

  • EngStudent says:

    GE –

    I was wondering if you know when the loan consolidation incentives will take effect? I am having difficulty pinpointing the date and was hoping to take advantage of the incentive this year. Thank you!

  • Tiffany_ChE says:

    Could you please give advice on how to handle student loans? Pay them off ASAP or hold them as they are “good” debt. What about the fact that I will meet the MAGI limit for interest deduction within a year or two of graduation. My interest rates range from 5% to 6.8%, most are unsubsidized and of the higher percentage. Are there other benefits of keeping the student loans? Other than they are forgiven upon death. Could it be a wise move when getting a mortgage in the next year (with a interest rate around 5%) to get enough $ to pay off the student loans, thus sort of rolling them into the mortgage. Is that even legal? Or just a dumb move. Any thoughts would be helpful.


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