By Karl Gotthardt
Ahead of an announcement by President Obama on Wednesday, the Secretary of Education Arne Duncan announced Tuesday afternoon that the Obama Administration would lower student loan payments on loans that start after January 1st. This is an acceleration of a program that has already been passed by Congress effective 2014. Arne Duncan said that the program would be at no additional cost to the taxpayer.
Pay as You Earn. This program would reduce student loan payments for more than 1.5 million students. Under present legislation students can cap their repayments at 10% discretionary income starting in 2014. Present student loans cap the repayment at 15 % of discretionary income. Obama’s executive action would provide relief starting on January 1st and would forgive the balance after 20 years, rather than the 25 years now in effect.
“College graduates are entering one of the toughest job markets in recent memory, and we have a way to help them save money by consolidating their debt and capping their loan payments. And we can do it at no cost to the taxpayer,” Duncan said. Duncan suggested that costs will be offset by money the government saves on administrative costs it pays private lenders.
Loan Consolidation. The Administration is also planning to offer students a chance to consolidate its federal loans, thereby reducing all loans to one payment, making it less likely for students to default on their repayment. The Administration estimates that today there are about 5.8 million borrowers who have a Direct Loan (DL) and Federal Family Education Loan (FFEL) that require separate loan payments would be affected.
While the Administration touts that this will be at no extra cost to the taxpayer, it would appear that there is a cost at the end of life of loans. First the reduced payments would make it longer to repay the loan and thus by reducing the amount repaid after 20 years when the loan is forgiven. The Administration can tout that there is no extra cost in the current fiscal year, but there will most certainly be an additional cost during the lifecycle of the loan.
“Economist Richard Vedder, director of the Center for College Affordability and Productivity, a Washington think tank, said the plan fails to address the roots of the student debt crisis and is an unlikely candidate to create any kind of stimulus.
“I don’t find this to be particularly constructive. I see it more as a political ploy. … The only thing I can think of is (Obama) is trying to score political points,” Vedder said.
Student debt has made headlines in recent months as student loan defaults rose to 8.8 percent in 2010 from 7 percent in 2009, while unemployment rates among recent college graduates 24 and younger climbed to 9.4 percent, the highest it’s been for that group since 1985. The national jobless rate in September was 9.1 percent.”
One of the loudest protests of the “Occupy Wall Street” movement has been the forgiving of the $1 Trillion worth of student loan debt. A Rasmussen poll published on October 25th says that only 21% of American adults believe that the Federal government should forgive those loans. 66% oppose forgiveness of loans. According to the poll Americans are more inclined to think that the government should help those who have not gone to college.
In the latest Rasmussen Daily Tracking Poll only 18% of voters strongly approve of the President’s performance, while 40% strongly disapprove. With declining poll numbers for the President, the latest battle cry has been “We can’t wait for the Congressional Republicans to act”. While Americans show general displeasure with Congress (both parties), they blame the President for the poor economy.
The program of lowering student loans appears to be an attempt to mobilize the youth vote, which helped elect Obama in 2008.