President Barack Obama will announce a new plan on Wednesday to allow students holding both private and government student loans to consolidate their debt into a single government loan, thus reducing their interest rates, according to officials both inside and outside the administration.
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The move, to be announced while the president is in Denver, is part of a White House push to emphasize actions the administration can take to stimulate the economy without requiring congressional approval.
The program could affect roughly 5.8 million people holding two types of student loans — those issued by private banks and direct loans issued by the government. Those choosing to consolidate their loans would not only benefit from a lower interest rate, and therefore lower monthly payments, but also additional loan forgiveness and repayment options.
Current repayment options allow graduates to limit their loan payments to 15% of their income, with all debt forgiven after 25 years of payment. Congress has already passed a change to that program that would allow borrowers to keep their loan payments to just 10% of their income, starting in 2014, with all loans forgiven after 20 years. Obama is expected to announced that he will speed up this program so that it will take effect in 2012 rather than 2014, a move one official says requires no congressional approval.
Obama already proposed a similar change for student-loan consolidation as part of his fiscal 2012 budget request. “The repayment process for these borrowers involves complicated record-keeping and making payments to multiple student loan holders, putting these students at greater risk for default due solely to the administrative complexity of the repayment process,” according to the budget request. The request said that savings would amount to as much of 2% for participating borrowers.
While at Obama’s request, Congress ended private lenders’ involvement in the origination of student loans in 2010, there were still many people who already hold privately-issued student debt who could benefit by converting the loans into the government program.