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President Obama’s Student Loan Relief Plan: How Much Will It Really Help?

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President Obama unveiled a student loan relief plan in Denver this week to much song and fanfare. But how much relief does the plan really provide? The main provisions of the plan include:

  • Capping student loan payments at 10% of discretionary income starting in 2012, down from a current plan to cap at 15%, starting at 2014.
  • Eligibility for debt forgiveness after 20 years, rather than the current 25.
  • The option to consolidate Direct Loans and Federal Family Education Loans.
  • An interest rate reduction of .5% for those who consolidate.

However, some have criticized the plan for not doing enough. Financial aid guru Mark Kantrowitz of FinAid.org told Forbes that while “some people will be genuinely helped,” he also believes that bill helps too few and not the people who are most in need of assistance.

America’s Student Loan Debt Landscape

Student loan debt sits at the center of the Occupy Wall Street movement. Indeed, student loans define the millennial generation in much the same way that the Vietnam War defined the baby boomers. Consider the following statistics, courtesy of the Institute for College Access and Success:

  • Two-thirds of all graduates have some student loan debt, including a whopping 96% of all graduates of private, for-profit universities.
  • As of 2008, the average debt load stood at $23,200, up 24% from 2004.
  • Those with Pell Grants  (a federal grant program designed to provide low-income families with access to education) are far more likely to graduate with debt — to the tune of 87%.

Larger amounts of debt are becoming increasingly common. The Institute for College Access and Success told the The Fiscal Times that only .5% of undergrads have debt over $100,000, though Kantrowitz believes this number skews low.

High Debt, Low Pay For Graduating College Students

Graduates face a number of challenges making debt repayment. Northeastern University economics professor Andrew Sum told the New York Times recently that 22% of all undergraduates are not working at all, with another 22% working in jobs not requiring a degree. A mere 34% of college graduates with humanities majors are working in jobs requiring a college degree.

Among graduates who have jobs working, salaries are low and declining. A study conducted by the John J. Heldrich Center for Workforce Development at Rutgers University showed a bleak employment landscape for those lucky enough to find jobs. Starting salaries for the classes of 2009 and 2010 stand at $27,000, a decline of 10 percent from $30,000 for the classes of 2006, 2007 and 2008.

With such high debt and low wages, no wonder many worry that student loan debt is America’s next debt bubble.

Will President Obama’s Student Relief Plan Help?

ABC News reported that only six million of 36 million student debt holders will receive any relief from the plan. These figures come directly from the White House. What tangible benefits, if any, will indebted grads see?

  • Loan Forgiveness: Student loan forgiveness is perhaps the best-sounding, though least-effective part of the plan. It will literally be two decades before anyone sees a direct benefit from it.
  • Lowered Payment Limit: Currently, 450,000 borrowers use the 15% cap on monthly payments. They’ll benefit from lowering the cap further. Daniel Indiviglio, writing for The Atlantic, estimates this will only affect grads earning less than $32,000. According to the National Center for Education Statistics, the media salary for bachelor’s degree holders between the ages of 25 and 34 in 2009 stood at $51,000 for men and $40,100 for women.  For those earning $32,000 (those who will see the biggest savings), the savings add up to a little under $90 per month.
  • Interest Rate Cut: The modest interest rate cut offered by consolidation offers modest benefits. Finaid.org estimates average student debt at $27,204 for 2010-11 graduates, compared with $17,616 a decade earlier. This places the average savings by the grads that consolidate at less than $10 per month.

Rethinking Higher Education

The student loan trap can be expensive, impacting a graduate’s earnings for most of her working life. Those interested in higher education should think carefully before taking out large student loans. The White House’s plan for student loan debt relief doesn’t do much to change the basic lay of the land.

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