Obama's Student-Loan Plan Scores Political Points but Offers Limited Relief

Jewel Samad, AFP, Getty Images

Speaking at the U. of Colorado at Denver last week, President Obama outlined the steps his administration is taking to help make student debt burdens more manageable.
October 26, 2011

With the nation's student-loan debt approaching $1-trillion, and default rates at their highest level in a decade, President Obama is taking modest steps to ease students' debt burdens.

Mr. Obama and administration officials announced changes this week that will reduce monthly payments for low-income borrowers and drop interest rates for students who consolidate into the government's direct-loan program.

The announcements—which came as the Occupy Wall Street protest stretched into its fifth week, fueled in part by borrowers with large educational debts and slim job prospects—were billed as a response to petitions urging the president to forgive student loans to stimulate the economy.

But the president's plan is a far cry from the kind of relief that the Wall Street protesters and other debtors are demanding, and it won't do a thing to address the roots of their repayment struggles: rising tuition and high unemployment.

Last year the unemployment rate for college graduates under the age of 24 rose to 9.4 percent, the highest level in at least 15 years. Meanwhile, college tuition has continued its inexorable climb, reaching an average of $8,244 for in-state students at public colleges in 2011-12, and $28,500 at private four-year colleges, according to College Board figures released this week.

Another challenge: Next July the interest rate on student loans will double, to 6.8 percent, costing the average borrower thousands of dollars over the life of his or her loan.

To be fair, there isn't much Mr. Obama can do about the rising cost of college, which is driven largely by cuts in state appropriations and other factors outside his control. And student-loan interest rates are set by Congress. Mr. Obama has certainly tried to tackle unemployment, offering a sweeping jobs bill that could have put some borrowers to work. He just hasn't been able to persuade Congressional Republicans to accept the bill's proposed tax increases for wealthy Americans.

Given these constraints, student-advocacy groups say they're grateful to the president for using his executive authority to offer borrowers some relief, however limited.

"The president is doing what he can with a paralyzed Congress," said Richard T. Williams, a lobbyist with the U.S. Public Interest Research Group. "It might be a limp when we need a leap, but we need Congress to provide that leap."

Under Mr. Obama's plan, current students who have both direct loans and bank-based guaranteed loans will get an interest-rate reduction if they consolidate into the government's direct-loan program. Roughly 5.8 million students could qualify for the benefit, the White House estimates.

The president is also accelerating a reduction in the maximum percentage of discretionary income that borrowers in income-based loan-repayment plans pay, from 15 percent to 10 percent. That cut was scheduled to take effect in 2014, but Mr. Obama's plan moves it up two years.

The combined changes will save some borrowers hundreds, if not thousands, of dollars over the life of their loans, but both come with caveats.

On the consolidation program, only borrowers with both direct and guaranteed loans will be eligible for the interest-rate reduction, and only guaranteed loans will receive the maximum interest-rate reduction of half a percentage point; direct loans will get only a quarter of a percentage point. The program will be in effect for only six months, from January until the end of June.

As for income-based repayment, the White House estimates that 1.6 million low-income borrowers will see lower monthly payments under a 10-percent cap; but only 450,000 borrowers have signed up for income-based repayment since it took effect two years ago, in part because the program has not been well publicized.

Most significantly, the benefit is available only to current students. Those jobless college graduates who are protesting on Wall Street and at similar events elsewhere won't qualify.

Mr. Obama, who won the 2008 election with the support of young people, has been under pressure from students and graduates to help borrowers saddled with unmanageable debt. More than 32,000 people have signed on to a "We the People" petition on the White House's Web site calling for loan forgiveness. A similar petition on has attracted more than 640,000 signatures.

Though the White House plan is much more modest than the relief the petitions propose, it could help Mr. Obama win back some young voters who have become disenchanted with the president for failing to accomplish more on the environment and other progressive causes.

In a speech on Wednesday at the University of Colorado's Denver campus, Mr. Obama empathized with college students carrying heavy debt, noting that he and his wife graduated from law school with a combined $120,000 in debt.

"We were paying more for our student loans than we paid on our mortgage each month," he said.

The changes, he said, would "give the economy a boost" by freeing up money that borrowers could use to buy a house, start a business, or save for retirement.

But the good will that Mr. Obama earned with his announcement could be relatively short-lived. Next July, just four months before the presidential election, interest rates on student loans are scheduled to double. For the average borrower with $24,000 in debt, that would mean nearly $5,000 more in interest over a 10-year loan-repayment term, according to the American Council on Education.

"While the administration should get credit for what they've done, the big issue for students will be the doubling of interest rates," said Terry W. Hartle, senior vice president for government relations at the council.

It's up to Congress to set interest rates, but don't count on voters to make the distinction. If they blame Mr. Obama for their rising debt, it could hurt his chances of re-election in 2012.

Asked if the president was concerned that the doubling could negate his efforts to make student loans more affordable, Melody Barnes, director of the White House Domestic Policy Council, said the administration was "trying to exercise the authority we have," but that interest rate-setting was "Congress's bailiwick."

"We're doing all we can to encourage Congress to move forward and address these needs," she said.