Obama Administration Takes Steps to Ease Burden on Student Borrowers

October 25, 2011

Fed up with Congress's failure to act on a jobs-creation bill that could put more recent college graduates to work, President Obama is taking steps to ease students' debt burdens on his own.

In a speech he will give on Wednesday in Denver, the president will announce plans to offer current students who have both direct loans and bank-based guaranteed loans a half-a-percentage point interest-rate reduction if they consolidate into the direct-loan program, administration officials said Tuesday.

While Congress ended the bank-based system for distributing federal loans in 2010, some $400-billion in debt is still outstanding on loans issued through the program. Roughly 5.8 million students who have at least one bank-issued loan and one direct loan will qualify for the benefit.

The move, which Mr. Obama first proposed in his budget for the 2012 fiscal year, has won praise from students, a demographic that helped Mr. Obama win the 2008 election. Current students will have between January and June of 2012 to consolidate to get the interest-rate reduction.

In a statement, Rich Williams, a lobbyist with the U.S. Public Interest Research Group, said allowing students to consolidate into a single program would reduce borrower confusion.

"Many students are overwhelmed with one foot in two lending systems, paying multiple lenders each month and looking on helplessly as their loan changes hands multiple times," he said.

The president will also announce plans to accelerate a reduction in the maximum percentage of discretionary income that borrowers in income-based loan repayment plans pay, to 10 percent. The cap was scheduled to drop from 15 to 10 percent in 2014, but Mr. Obama's plan moves the effective date up by two years, to 2012.

There are currently 450,000 borrowers in income-based repayment plans; millions more borrowers are eligible for the program.

In a conference call on Tuesday, Melody Barnes, director of the White House's domestic-policy council, told reporters that the changes were "not a substitute for the bold actions that we need to create jobs," but said they would help borrowers struggling with debt in the difficult economy. She noted that more than 30,000 people have signed a petition urging the president to forgive student debt to stimulate the economy.

"It's a message the president has received loud and clear," she said.

She said the consolidation program won't add to the federal deficit because the government, in acquiring the loans, will no longer have to pay subsidies to the lenders that held them.

Secretary of Education Arne Duncan said the program would also simplify repayment, making it less likely that borrowers will default. Student-loan default rates have been climbing for several years, reaching 8.8 percent in the most recent figures.

"College graduates are entering one of the toughest job markets in recent memory, and we have a way to help them save money by consolidating their debt and capping their loan payments," Mr. Duncan said.

Standardizing Financial-Aid Information

In another move to help student borrowers, the Consumer Financial Protection Bureau and the Education Department have released a draft model disclosure form for the letters that colleges send to students offering financial aid. The Education Department has been working on such a form, to help students better understand the type and amount of aid they qualify for and to make it easier for them to compare aid offers from different institutions. Some colleges, however, fear that a format offered as a model could become a mandate.

The consumer-protection bureau, which was created by Congress last year, and the department describe their model format as a "financial aid shopping sheet" and say it is being presented it as "a thought starter," not a proposal. The bureau's Web site solicits viewers' feedback on the draft form.

The bureau has also released a "Student Debt Repayment Assistant" where borrowers can learn more about their payment options.

U.S. Rep. George Miller of California, the top Democrat on the House of Representatives education committee, said the White House's moves would provide "real relief to student borrowers who are in or about to enter a challenging job market."

But a spokeswoman for Rep. Virginia Foxx of North Carolina, the committee's Republican chair, called the move "another example of the Obama administration making changes to federal education policy behind closed doors."

"We are disappointed that the Department of Education chose not to engage committee members prior to announcing this plan to the press," said the spokeswoman, Alexandra H. Sollberger.