posted 2011-11-18 15:12:30

Obama's Student Loan Plan

What it means (or doesn't mean) for you

Eugene Ostrovskiy—Staff Writer

"Yes we can" has now become "We can't wait." President Obama recently bypassed Congress with an executive order intended to help college students pay off their student loans. This is in response to protests from Occupy Wall Street and from We The People, an online petition service offered by the White House, which asked the administration to forgive student loan debt. The White House response falls short of that, but it does provide some aid to those paying off their student loans. Obama's student loan plan will do the following: starting in 2014, student loan payments will be capped at 10% of income (down from 15%); starting next year, loan payments will be capped at 10% of the loan (down from 15%); loans will be consolidated, which is estimated to reduce the interest rate by 0.5%; and student debt will be completely forgiven after 20 years.

Today the average student loan debt is $25,000, with the nationwide total amount of student debt over $1 trillion, and the average starting salary is $50,000. Estimates of Obama's plan show that it would make little difference to students who are in debt. According to an estimate done by The Atlantic, students with an average amount of debt and income would only save a few dollars a month on their payments. Those who have more debt and are near the poverty level would save up to $200 a month on their payments.

According to CUNY Value, the average student loan debt among Hunter students is $7,500. Assuming an average interest rate of 10%, by paying only 10% of an average starting salary, the debt can be paid off after about a year and a half, provided that some of the debt is being paid off while attending college. Even if a student waits until graduation, but is able to get a job with a starting salary of $50,000, the debt can still be paid off in a little over two years. There is only a problem when no jobs or only very low-paying jobs are available, as more interest then accumulates. Obama's plan has shown to create a minimal impact on Hunter students.

The average debt for Hunter students is almost four times smaller than the average student loan debt. If you factor interest a faltering economy and a staggering job market, paying back student loans becomes a difficult task. Fortunately, the average starting salary has gone up by 3.5% from 2010 values, according to the National Association of Colleges and Employers (NACE). If this trend continues, it will provide further relief to recent graduates.

But the efforts of the NACE are undermined by some for-profit colleges, which estimate the amount of federal aid students will get, and then raise the price of tuition accordingly. In 2009, Bloomberg Business and Finance News estimated that the University of Phoenix earned a total of $3.8 billion, and that 86% of that came from the Department of Education. Recently, the DOE tried to change its rules regarding for-profit colleges, stating that they have to prove their graduates receive jobs before getting grant money, but lobbyists are currently blocking that legislation. According to the DOE, the amount of government money going to Pell Grants doubled over the last three years, but this is still not enough to address rising costs of education.

If the Obama administration wants to solve the problem of student debt, the obvious solution is more government grants to students. Unfortunately, the cost of tuition is rising much faster than the benefit of Pell Grants, which have changed little since 1976. We need more funding for education instead of reckless spending, whether that spending is on wars or bailouts. Maybe instead of spending money to help people pay for their education, the government can take steps to make education cheaper instead. If Obama actually wants to help students pay off their loans, he should solve the problem at its source, instead of treating its symptoms.