Earlier this week, President Barack Obama announced a plan to cut education costs through an executive order that would allow students holding both private and government student loans to consolidate their debt into a single government loan, thus reducing their interest rates.
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With the growing cost of college rapidly outpacing the economy and incomes, student loans are becoming heavier and heavier burdens on graduates. Obama seeks to alleviate some of that burden with an executive order, which allows him to bypass congressional approval, that contains three main components.
The first component will clear the way for borrowers with direct government loans and government-backed private loans to consolidate their balances, effectively cutting their interest rates on all of their debt by up to 0.5%. The second component seeks to limit the amount of monthly student loan payments to 10% of a graduate’s income; the current limit is 15%. The final component would have all debt outstanding after 20 years be fully forgiven; forgiveness currently occurs after 25 years.
The last two components of the President’s executive order were already approved by Congress, and scheduled to take effect in 2014. The president has only moved up their implementation to the beginning of 2012. The first component would seem to be the most significant, but the impact for the average borrower will be rather small.
In 2011, the average Bachelor’s degree recipient held a balance of $27,204 in student loans, according to an analysis done by finaid.org based on Department of Education data. A decade ago, the average was $17,646. For borrowers with $17,646 in debt, the savings would amount to $4.50 a month, while borrowers with $27,204 in student loans would save $7.75 per month. While that will certainly amount to significant savings over many months and years, the burden of monthly payments will be little alleviated.
The government currently has a program that allows borrowers to cap their student loan payments at 15% of their income. However, only 450,000 borrowers are currently participating in the program. While the new 10% cap could potentially benefit those 450,000 borrowers already taking advantage of the 15% cap, there is a question as to how many, if any, new participants will actually take advantage of the program.
While the loan forgiveness aspect of the president’s executive order will have a significant impact on many borrowers, it won’t have much of an impact for years to come. Roughly 82% of outstanding student loan debt has been accrued in the past decade, which means it will be at least another decade before any of those borrowers hit the 20-year mark.