Obama issued an Executive Order today that brought extra relief to some student loan borrowers. A 2010 law allowed for repayment caps at 10% of a borrower’s income, though some loan holders were ineligible. This Executive Order expanded those who could qualify for the income repayment plan.
From the NYT: “Mr. Obama’s main action will be to expand on a 2010 law that capped borrowers’ repayments at 10 percent of their monthly income. The intent is to extend such relief to an estimated five million people with older loans who are currently ineligible — those who got loans before October 2007 or stopped borrowing by October 2011. But the relief would not be available until December 2015, officials said, given the time needed for the Education Department to propose and put new regulations into effect”.
Though this Executive Order — and its 2010 law counterpart — may sound well and good, financially it is a disaster. The 10% income repayment does not help any young person get off on a solid financial footing. Likewise, because some sectors allow for loan forgiveness after a period of time, that amount gets written off by the federal government, thereby substantially adding to the federal debt.
For example, if someone borrows $30,000 a year for 4 years for a degree, that is $120,000 of student loan debt. The debt carries an interest rate of at least 6%. The Obama repayment plans offer an option that allows borrowers to pay 10% (it used to be 15%) of what they earn, and if not fully paid back by the end of ten years, any balance is forgiven.. So for instance, if a new graduate lands a job that pays a generous $50,000/year, he/she would pay back $5,000/year. With interest of at least $7,200 ($120,000 x 6%) which likely does not even cover the interest on the original $120,000 loan.
There is almost no way a borrower can begin to pay back anything on their loan, and by the time they actually can make a dent, the additional interest accrued would have ballooned the total loan amount to at least $150,000. This is financially crippling for a young person.
The costs for the 10% repayment program since its implementation have ballooned from $1.7 billion in 2010 to $3.5 billion in 2013 to an estimated $7.6 billion for 2014.
This Executive Order seems to be a precursor to a bill being pushed by Senator Elizabeth Warren, which Obama has said to endorse. It “would allow borrowers to potentially save thousands of dollars by giving them a chance to effectively pay off their high-rate existing loans in exchange for new loans that carry substantially lower interest rates”.
How would this program be paid for? A new tax or increased taxes on the wealthy, of course.
The real impact of this higher education reform is that the government is now encouraging people to borrow substantially for their education, while simultaneously providing an avenue for students to avoid paying back much of their funds — leaving the taxpayer on the hook, a deficit in freefall, a tax increase for targeted high income earners, and an economy in stagnation.