The Obama Administration is moving forward with its plans to provide some assistance for those struggling to pay off their student loans. However, those in the industry are questioning whether it will actually help and some are worried it could make the problem worse.
Obama outlined his new “Pay-As-You-Earn” program Wednesday before college students in Colorado. The proposal, which would take effect in January, would let borrowers reduce their monthly payments to 10 percent of their discretionary income (it’s currently capped at 15 percent) and forgive any outstanding debt after 20 years of regular payments (down from 25 years).
The changes were approved by a Democratic-controlled Congress in 2010 and were originally supposed to take effect in 2014. Obama had included the plan in his budget and Jobs Act that were stopped by Republicans in the U.S. Senate. The administration estimates 1.6 million Americans will be helped by the changes. “Our economy needs it right now and your future could use a boost right now,” he told the students.
Dr. Ed Miller is the director of financial aid at the University of South Carolina. He says student loan debt is a growing problem as college becomes ever more expensive. “It’s unfortunate that students have to depend on student loans at the level they are,” he told South Carolina Radio Network, “I can tell you that the programs that were originally loans of convenience have become loans of necessity.”
However, the second part of the plan is drawing fire from the nonprofit groups and companies that provided the loans. Prior to a law that took effect two years ago, many student loans originated from banks, which were then guaranteed by the federal government. At the time, Obama called it “wasteful and inefficient” to pay banks to act as middlemen. Now, any new student loans come directly from the U.S. Treasury.
Under the plan announced Wednesday, students holding the pre-2009 private loans could combine them with the direct loans for a 0.25% decrease in their interest rate. According to the White House, a teacher facing $25,000 of debt while earning $30,000 per year will have their payments cut to $114 per month.
However, the providers say that is not likely to be the case. Chuck Sanders is CEO of South Carolina Student Loan Corporation– a nonprofit which currently holds $3.2 billion in loans made before 2009. “The government’s giving them a quarter-percent reduction to move over to this new program,” he said, “Well, we’ve given away as much as 2 percent reductions. So it could be the student would be much worse off if they go to this program. Who’s going to counsel these borrowers to tell them what’s in their best interest? You’re talking about a lot of money (in debt) some of these students have.”
Sanders said the Education Department does not let SC Student Loans know how many of its borrowers would be eligible for the program, so he has no idea how many could switch over to the federal plan.
Sanders said he found it ironic the President was pushing the program as part of his Jobs Act, “A quarter-percent reduction in somebody’s interest rate on their loans doesn’t create a single job,” he said, “But it could have the opposite effect for an organization like us… If we have our portfolio pulled out from under us, we certainly would have to lay off people.”
Miller says he thinks the President is trying to help out those graduates who are struggling to find jobs, but says he’s concerned that it will not address the real reason new graduates are struggling to pay their loans off: college tuition is skyrocketing and a rough economy is preventing students from getting jobs to pay down their debt once payments begin six months after graduation.