Cost of Education, Domestic, Institutions, Markets, Policy, Required, Student Loans, Students, University & College - Written by on Thursday, October 27, 2011 18:21 - 0 Comments

President Obama’s Student Loan Overhaul Plan: Eligibility Remains Fuzzy

by Samantha's Photography ☮ via Flickr under CreativeCommons

Barrack Obama’s student loan plan naturally has mixed reviews, it depends on who you are and where you stand. With interest on student loans increasing to 6.8% next year, critics feel the government is taking advantage with its new plan- as the government borrows at rates below 1% and more loan repayments would go to the government (rather than to banks). And then there’s the question of impact- how many of the projected 7 million will qualify? Eligibility is fuzzy at present.

To break it down, there are two components:

  1. Incentivizing consolidation of federal student loans.
  2. An expansion of loan repayment based on disposable income.

So, what’s the incentive to consolidate and who is it for?
Let’s get to who first- Borrowers who were enrolled in loan programs prior to 2010 when the government began direct lending of all loans.  More specifically, borrowers who are making loan payments both to banks under the Federal Family Education Loan Program (FFEL) and to the federal government for direct loans.  The Department of Education surmises that these borrowers will be less likely to default by consolidating their debt, making one payment.  As for which borrowers are eligible, they will be notified in July 2012.

And the incentive is a .25% lower interest rate for consolidating and an additional .25% reduction for enrolling in automatic payments.  So up to a .50% reduction.

How will disposable income-based repayment be expanded and who is it for?
In the current program, which has 450,000 enrollees, borrower payments that exceed 15% of disposable income are reduced on a sliding scale. The new program would allow for reductions at 10% ratio of debt to disposable income. And after 20 years there would be forgiveness on outstanding loan balances. Which is 5 years earlier than the current program.

Getting to who- Current students for the most part. But who’s eligible? Well that’s a good question.

Here are some basics (via Who Qualifies for Obama’s 10% Student Loan Payment Cap – The Atlantic):

Take your gross income and subtract 150% x the poverty line.  Then multiply that number by 10% (instead of 15%) and that will give you your maximum annual student loan payment and then you can calculate it per month.  But your loans have to be high enough in the first place, it also depends on when you took out your loans, and the kind of loans- they must be federal or federally-backed private loans.  If you have defaulted, you cannot qualify.

Legislation related to the expansion was approved by Congress for 2014.  Obama however plans to push date up to 2012.

For more information WA suggests the following articles:

  1. Inside Higher Ed: Loan Changes, Sans Congress by Libby Nelson
  2. The Atlantic: Who Qualifies for Obama’s 10% Student Loan Payment Cap? by Daniel Indiviglio
  3. The Washington Post: Obama Unveils Student Loan Relief Plan in Denver Campus Appearance by David Nakamura and Scott Wilson
  4. The American Nightmare: Student Debt Will Be A Long-Term Drag On The Economy

Eva Pereira at writes about the populist dynamics that are playing into Obama’s plan at the Occupy protests happening in Wall Street and other major urban centers:

  With the Occupy Wall Street protests entering their fifth week and growing, one issue that’s frequently brought up is the crushing student debt burdens that many face. In an era of high unemployment and stagnant wages, student loan defaults have reached their highest level in more than a decade. Outstanding student loan debt is projected to reach $1 trillion by year’s end. Barely more than a third of loan holders are actively paying down their debts, indicating that the burden may be too much for many. What effect will the ballooning student debt load have on the economy in the long term? According to Alan Nasser, professor emeritus of political economy at Evergreen State University, the American dream is about to become the American nightmare.

….Student debt burdens are by far the highest at for-profit colleges, which targetlow-income students with online learning programs and flexible work-study arrangements. Although those who attend for-profit institutions represent only 9% of all college students, they receive roughly 25% of all Federal Pell Grants and loans, and are responsible for 44% of all student loan defaults, according to Pew Research.


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