President Barack Obama announced a plan to reduce monthly payments for more than 1.6 million current college students and borrowers Wednesday, two weeks after the New York Federal Reserve Bank announced that student debt has surpassed the national credit card debt.
The plan proposes two solutions to reduce former students’ financial obligations after graduating: decreasing the rate of income-based repayment loans and consolidating student debt. A statement from the White House said the goal is to make college affordable.
Income-based repayment loans currently require students with outstanding loans to contribute 15 percent of their monthly income toward their loans, said Jose Santos, an assistant professor of education.
The Obama plan would reduce this amount to 10 percent of the debtor’s income, according to a statement released by the White House.
The cap would reduce monthly payments for more than 1 million student borrowers in the country.
A person can have both private and government student loans with different interest rates within the current guidelines. Under the new debt consolidation program, the federal government would take over private loans and the borrower would repay their loan directly to the government at a single interest rate.
“Debt consolidation makes people liable to the government alone instead of several banks and the government,” Santos said.
There are almost half a million people in the United States who have student debt from multiple lenders, he added.
The two steps were planned to take effect in 2014, but the White House made changes to the law so that it will begin in 2012 and will apply to anyone who has taken out a student loan after 2008.
Time-based debt forgiveness is also being addressed by the new program. The current loan program forgoes all outstanding debt after 25 years. If passed, the new plan would reduce that to 20 years.
Mitchell Chang, a professor of education, said he thinks Obama’s program will encourage more people to enroll in college and is ultimately an investment for the country.
“People who get a college degree continue to earn much more than those who do not,” he said. “Any money lost on this legislation will be more than regained on future taxes from the professionals that benefit from the plan.”
Less student debt means a more productive work force, Chang said.
“Students are facing the prospect of a very competitive job market and a lot of stress,” Chang said. “Eliminating some of the student debt would decrease the pressure students are facing when they leave college.”
But Gary Galles, a visiting professor who teaches economics and public policy, said he was skeptical about how the government would secure money to pay for the new debt consolidation program.
Because graduates will be able to pay off their loans based on a portion of their income, the program may be helpful if they come across a tougher job market, Galles said.
The effects of the plan will be unclear until it is enacted, Galles added.