As we all know Obama has pledged to assist students with student loan debt in his last speech here in Denver. He pledged to doing this by,
1. Lowering the repayment cap to 10% of one’s income from a current 15%
2. Reducing interest by allowing consolidation. Borrowers can save up to .5%
3. Forgiving federal loans after 20 years compared to 25
Although I think this is a good start in helping the enormous problem of student loan debt, it is not nearly enough in my opinion. With an average student debt of 27k, an interest reduction of .5% will be saving students less than $8.00 a month. In addition, only a percentage of borrowers will be eligible to take advantage of these benefits. So what to do now? Well as some suggest, simply forgive all student loans to date. Although I would love to see this happen for personal reasons, it may be a bit unrealistic. While reading the Chronicle, I came across another option, Income Based Loans. Other countries including Australia and Britain have shown success with this form of loan repayment.
What exactly is an income – contingent loan system? Well right now most students repay their loans on a fixed schedule. With a high percentage of loans going into default, this is clearly not working. Graduates are less likely to make a decent salary early on compared to later on in their careers. With an income - contingent system, loans are repaid based on one’s salary. If one earns a raise, their monthly payments go up. However if one loses their job and their income falls below a certain amount, payments stop. After a certain period of time loans are forgiven.
In this proposed system the term “default” is essentially eliminated. Payments are directly taken out of a person’s paycheck. Professionals who choose to go into lower paying fields such as social work won’t have to worry about being able to make their payments on time. It is true that taxpayers will bare the burden of loans that are partially forgiven. However this is already happening with an increase in loan defaults. The primary reason this concept has not been put into place to date is administrative complications. Until last year, private banks acted as lenders for student loans creating a bureaucratic nightmare for the government. Now that this system has changed and the lender is the US Department of Education acts as the lender for federal loans, an income – contingent system is more realistic.
To me, financial aid is a complicated matter. I have tried to understand the process but still have plenty to learn. According to what I have read, income based repayment seems like a great option for the increasing number of students accruing a large amount of debt. Despite the fact that is does not get to the major problem of rising costs in higher education, it may make it easier for borrowers to actually start a life after graduation.
I understand this is a complicated issue, and I don't necessarily agree, for a few reasons.
ReplyDeleteFirst, what are the ramifications for forgiving student debt? Someone has to take on that debt. It doesn't just go away. What do we do about the people next year who graduate? Do we get rid of their loans too? Also, what does this teach students about debt? The current economic crisis was largely caused because people took on debt they couldn't afford, so are we setting up an entire generation to repeat the mistake of sub-prime mortgages and credit card debt? Although I'd like to believe college is a "social good" for the community, it does (most always) give direct benefit the educated more than the taxpayer. This relates back to our class conversation about the neo-liberal vs welfare state.
Since some institutions, UNC in particular, are already charging students more based on their academic field, I think basing what they pay on their salary after graduation is the next logical suggestion. Does that mean if students are unable to maintain employment they are not held responsible for their loan? No, it means they would be paying off the student loans for a longer period of time. When I see new graduates being hired with $15,000 bonuses for jobs I can do but don’t have a degree for, I certainly rethink my educational situation! Also, I firmly believe an education means nothing unless it is earned and that also includes the financial investment. This would also make the loan agencies, aka the government, reassess the amounts offered to students, and the process by which we receive federal aid. At the very least, I hope I have a chance to enjoy Obama’s pledged changes before my payments begin!
ReplyDeleteAlthough I am all for lowering the cost of education, I have mixed feelings about the loan forgiveness element of Obama's plan. I've wrestled with my personal sense of what's fair (as I'm nearing the end of my own undergraduate debt repayment... which has not been forgiven-- "hey that's not fair... waahh...") with the bigger picture of what's really best for most students and our educational system as a whole. Immediately after Obama's talk on Wednesday, I already heard students joking (but was it really joking?) about how they might as well max out their loans now, since they would be forgiven eventually. Granted, I don't know if this will be a possibility for students to manipulate the system this way, but my sense is that students are interpreting his words in many different ways. The interpretations that I've heard over the last few days concern me. What message does loan forgiveness send students about their responsibility to fulfill their obligations and commitments?
ReplyDeleteIt is great to see something being done about the student loans but I agree with Holly that this isn't quit enough. I am not a great advocate of any loan forgiveness but I did a recent post on having the loan payments be dependent upon one's income.
ReplyDeletehttp://currentevents695c.blogspot.com/2011/10/revision-of-student-loan-repayments.html#comments
I truly like how it is handled in other countries in that no loan payments are required if your income falls below a certain level. This certainly helps those students not able to find a job and those that kind find the type of job they were hoping for. I also like that fact that their payment increases as their salary increases. With this type of program loan defaults decrease according to the article that I had researched.
So a baby step in the loan program but many more steps are needed! Hopefully, they come soon!
While, for entirely personal reasons, I would love to win the lottery and have my student loans forgiven, I do not believe that is the best option and it seems reactionary.
ReplyDeleteI've noticed two significant shifts over the last 15 - 20 years that, in my opinion, should be addressed which will ultimately address the issue of outstanding student load debt. The first is the cost of higher education; there is a significant difference in the cost of my first college course and the one in which I am currently enrolled (granted, I'm also comparing undergraduate and graduate levels). The second is the student perception of the purpose of financial aid. My institution has seen a 20% increase in the number of students using financial aid in the last five years and we have seen a shift from students avoiding student loans altogether, or taking the least amount they could to cover tuition, to students taking out the maximum amount of loans.
If we could work proactively to control costs and focus efforts on helping students understand their financial aid within the larger concept of financial literacy, I believe the issue of loan repayment will be less of an issue.