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