Obama Speeds Up Aid for College Students: How Will It Help You?


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President Obama pitched a plan today to help ease the burden of loans on college students, as a new report shows that higher education is becoming more expensive for many young Americans.

Starting next year, borrowers’ student loan payments will be capped at 10 percent of their discretionary income, and they could be eligible for forgiveness on the balance of their debt in 20 years. Under the current plan, loan payments are limited to 15 percent of a borrower’s discretionary income, and their balance is forgiven after 25 years.

The plan will also help provide an opportunity for reduced interest payments. Students would be able to consolidate their Federal Family Education loan with their Direct Loan under existing terms and conditions. Proponents say the consolidation will simplify the payment process and help nearly 6 million borrowers. Borrowers who consolidate their payments will receive a one-time, half percent reduction on their interest rate for some of their loans.

The administration says it is also taking steps to make it easier to participate in the Income-Based Repayment Plan. Currently, students and alumni whose federal student loan debt is higher than their income and family size are eligible to participate, but many are not aware of the aid plan. While more than 36 million Americans have federal student loan debt, less than 450,000 Americans participate in income-based repayment, according to the White House.

The current plan includes other helpful measures. For those who cannot pay the interest on their bill, the government can foot the interest payment for up to three consecutive years. Those who work in public service are also eligible for forgiveness after 10 years.

The administration’s Pay as You Earn plan, announced today, has the potential to cut hundreds of dollars from a borrower’s loan payment, the administration says, and it will help about 1.6 million students and alumni. But there are caveats, the biggest being that current borrowers will not be eligible to participate. Only those who are in college or university and who take out a student loan next year will be eligible.

“The students who signed the petition [to the president] and the students in ‘Occupy Wall Street,’ most of them are students who have already graduated. Most of them are unemployed and need help,” said Mark Kantrowitz, publisher of FinAid and a student aid expert. “They are the ones who brought attention to this issue and most of them are not going to benefit from this.”

Even many existing borrowers might not benefit from it. Borrowers who are just in the Direct Loan program do not qualify for the interest rate savings, and those who are consolidating loans would have to sign up for automatic payment to be eligible for the interest rate cut.

Consolidation may not even make financial sense for some split borrowers. For students with multiple interest rates who are able to accelerate payment on one loan, it may be more feasible to first pay off the loan with the higher interest rate instead of combining the payments.

The income-based repayment plan is also not available for parent loans or private student loans. Federal loans account for 80-85 percent of all outstanding loans, while the rest are private.

The White House says the plan will help nearly 6 million Americans, only a fraction of more than 36 million borrowers in the country.

The plan was initially set to start in 2014 but Obama’s executive order speeds up its implementation. The price, however, will not be paid by taxpayers, the White House says. The administration has balanced the cost of early implementation with the second measure – allowing students to consolidate their loans – which will put more money into the government’s coffers.

“In a global economy, putting a college education within reach for every American has never been more important,” Obama said in a statement. “But it’s also never been more expensive. … Steps like these won’t take the place of the bold action we need from Congress to boost our economy and create jobs, but they will make a difference. And until Congress does act, I will continue to do everything in my power to act on behalf of the American people.”

Obama’s $447 billion jobs billed is stalled in Congress because of Republican opposition. Meanwhile, the economy continues to spiral downward even as Washington remains in a gridlock.

The president says today’s announcement is part of his push to implement measures to stimulate the weak economy. But critics are deriding the move as a way to attract more voters.

With the economy taking a toll on young Americans and recent graduates, many college students have taken their frustration to the streets as part of the “Occupy” protests and by organizing walkouts and demonstrations.

The cost of education overall has jumped 900 percent since 1978, while the total U.S. student-loan debt is nearly $1 trillion. The unemployment rate for people younger than 30 is 13 percent, higher than the national average. Many college students have taken their frustration to the streets as part of the “Occupy” protests and by organizing walkouts and demonstrations.

A new report from the College Board finds a significant raise in college fees. Average in-state tuition and fees at four-year public colleges surged 8.3 percent this year and more than 4 percent at private colleges. The College Board said the tuition increases were caused by weak economy and a lag in state funding that has not kept pace with the growth in college enrollments. Most of that surge was driven by California, where college costs rose by 21 percent.

The average in-state tuition at a public four-year institution for 2011-12 is $17,131, while at a private institution it is $38,589.

The report also concluded that recent measures by the administration to provide educational tax credits and tuition deductions helped increase savings for students.