The Obama administration announced on Tuesday an initiative to help students who are having difficulties paying off their student loans.
Under the new initiative, students and borrowers will be able to cap the amount of their income that must be devoted to student loans sooner. They also will be allowed to consolidate government-backed private loans and loans the government directly issues to provide students with lower interest rates and payments.
“We all know how large student debt has become across the country,” Secretary of Education Arne Duncan said. “This is trying to address a real challenge.”
The announcement follows a push the Obama administration has been doing to circumvent Congress to get the economy moving because of near unanimous Republican opposition to any proposals President Barack Obama has put forth. The student loan initiative follows announcements of policies to help home owners refinance their mortgages and get veterans back to work.
It also comes shortly after a report showed student loan debt has surpassed credit card debt as the nation’s top financial burden in the fall of 2010. In fact, according to the Project on Student Debt, the graduating class of 2009 – the first graduating class to really feel the effects of the Great Recession in regard to the jobs market – had an average and increasing debt burden of $24,000.
Melody Barnes, the director of the Domestic Policy Council, said the change would affect 1.6 million borrowers and “could reduce their payments by hundreds of dollars every single month.”
“These are real savings that will help graduates get started in their careers,” Duncan said. “These changes could make a big difference in the lives of current college students and recent graduates as they enter one of the toughest job markets in recent memory.”
Specifically, students and borrowers will be able to cap their student loan payments at 10 percent of their total income with all remaining debt forgiven after 20 years at the beginning of next year instead of 2014 – current law has the cap at 15 percent with all debt forgiven after 25 years. The change also would let lenders consolidate the two types of loans into a single government loan beginning next year, which could reduce interest rates by up to half a percentage point and also lowering monthly bills.
Still, it is unclear how many students will take advantage of the change. Since 2007, borrowers have been allowed to cap federal student loan repayments at 15 percent of discretionary income but White House officials have said 450,000 of the country’s 36 million student loan borrowers are participating in the income-based repayment program.
The student loan initiative also will be paid for by using savings from the elimination of loan subsidies to pay for the reduction on interest rates on loans that are consolidated.
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