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Obama Proposes More Generous Loan Repayment Plan

January 26, 2010

by Emily

Even as much of the student loan agenda President Obama announced last year remains stalled in Congress, he is expected to propose a new plan to assist middle-class workers in repaying their student loans as part of his State of the Union address on Wednesday. On Monday, the White House announced some of the points Obama plans to address, and among the items is a plan to make student loan payments more affordable.

Obama’s proposal would alter the federal Income-Based Repayment plan to make it beneficial to a wider range of borrowers. Currently, college graduates who choose Income-Based Repayment are expected to make loan payments equivalent to 15% of their discretionary income each month (defined as income above 150% of the poverty level for the borrower’s household size) and to make consistent payments for 25 years, at which time their remaining loan balances will be forgiven. Under the new plan, borrowers would have to make payments of only 10% of their discretionary income each month, and would only have to make payments for 20 years before their remaining balances are forgiven.

This change would have an added bonus for students pursuing careers in public service. Students who enroll in IBR and work in approved public service fields (such as teaching, healthcare, non-profit work, or government employment) can see their loans forgiven after just 10 years of payments in IBR. For many students, this can mean a substantial reduction in their overall loan obligations as well as more easily manageable payments as they begin their careers.

To illustrate the benefits of the President’s proposal, the Institute for College Access and Success provided the following example: someone with $33,000 in student loans who currently makes $30,000 per year would have a loan payment of $110 per month under this plan, compared to $170 per month under the current IBR plan, and $380 per month under the standard repayment plan.

Although it has the potential to enormously benefit individual borrowers, the proposed adjustment to the IBR plan is likely to run into some opposition. In the example above, as in many other cases, the new IBR plan will result in a significantly smaller amount being repaid by borrowers, especially those who go into public service. However, it may substantially reduce borrowers’ likelihood to default, which would prove beneficial overall. Still, calculating the overall cost to taxpayers is likely to be vital to this proposal’s viability, especially given the Obama administration’s announcement of a planned three-year freeze on federal spending.

Overall, these changes would benefit an estimated 36 percent of borrowers, according to Inside Higher Ed. The National Association of Colleges and Employers lists the average starting salary for college graduates at $48,633, and depending on household size and overall debt, graduates in this bracket may not see much benefit from IBR. By contrast, the average starting salary for liberal arts graduates is $36,624, making them most likely to benefit from this program. However, many recent graduates are considering themselves lucky to find jobs paying substantially below these figures right now. It’s likely that a broad range of college graduates, especially those pursuing careers in fields that have been badly impacted by the recession, may welcome the proposed changes.

What do you think of this plan?  Would it help you or would you rather see federal resources being used in another way?


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