Obama plan to ease college debt wins praise
A plan announced Wednesday by the Obama administration to take a bite out of student loan debt was hailed by local college officials who say it will help to dull ever-rising college tuition costs.
Obama's "Pay As You Earn" proposal would reportedly reduce monthly payments for more than 1.5 million current college students and borrowers starting in 2012 to 10 percent of their discretionary income -- down from 15 percent now. Whatever is left on the debt would be forgiven after 20 years of payments. Current law allows forgiveness after 25 years.
Also, starting in January, about 6 million students and recent college graduates would be able to consolidate federal student loans and private bank loans that are backed by the government.
Obama's plan is part of his effort to create more jobs and ease the burden of the second-highest source of household debt.
The average debt of Connecticut students who attended four-year, public and private colleges is $25,038, according to the Institute for College Access & Success. The total is the 14th highest in the nation, according to the institute.
With Congress unlikely to pass his jobs bill, Obama said this is something he can do without Congress' help and at no cost to the taxpayer, since the funds for it already exist in the U.S. Department of Education budget. It could also help shore up re-election support among young voters.
In Connecticut, it is estimated that more than 12,000 current students would be able to lower their monthly payments through the program and more than 39,000 borrowers would be able to reduce their interest rates and simplify their payments by consolidating loans.
Jean Main, director of student financial aid services at the University of Connecticut, where about two-thirds of graduates leave with an average student loan debt of $21,257, called the announcement good news.
"Of course this will help. I think it will help students all over. I think it's a broad-reaching plan that will have broad-reaching impact," said Main. She said the biggest impact will probably be for students who graduate into low-paying professions or have trouble finding immediate employment.
Roberta B. Willis, House chair of the state's Higher Education and Employment Advancement Committee, also welcomed the news, especially for students struggling with record debt when they graduate. "This plan will help them manage their finances when they are first starting out," she said.
Others were less impressed. Vince Sampson, president of the Education Finance Council in Washington, said the plan merely moves loans from the private sector to the federal government and is too limited. It gives borrowers just months to sign up, restricts eligibility to borrowers who have not defaulted on their loans and limits the 10 percent discretionary earnings payment cap to students currently enrolled in school who took out their first loan in or after 2008 and will take out another loan in 2012.
"The proposal does little for borrowers struggling to repay student loans in today's distressed job market (and) does not address the real student debt problem: rising tuition and the lack of well-paying jobs," Sampson said.
The new plan comes at the same time as a new report by the College Board that shows the increase in public tuition costs rose more sharply than the increase in private college tuition for the fifth straight year. The increase at four-year public colleges nationwide was 8.3 percent compared to 4.5 percent at private four-year colleges.
Connecticut had one of the lower public college tuition increases, at 2.5 percent, according to the report. In California, which enrolls about 10 percent of the nation's public four-year-college population, the increase was a whopping 21 percent.
There is a wide variance between tuition costs depending on the state. The average annual tuition cost for four-year public colleges in Connecticut this year is $9,197, while in Vermont it was $13,078. For private four-year colleges, the average annual tuition cost in Connecticut is $35,991 this year -- the highest nationwide -- compared to $6,614 in Idaho.
Meanwhile, the Obama administration is saying its debt consolidation plan would affect about 5.8 million borrowers who have both direct student loans or a Federal Family Education Loan. Borrowers who take advantage of the consolidation option could receive up to a one-half of 1 percent reduction in their interest rate, which means lower monthly payments and hundreds of dollars in interest saved over the course of the loan.
Lisa Donner, president of the Institute for College Access & Success, called the Obama announcement important and timely. She applauded any effort to tie student loan repayment to income and "pay-as-you-earn" options.
Donner said it is also important that with the changes, borrowers know that it's available. Her institute, an independent, nonprofit policy organization that works to make higher education more available, studies the impact of student debt on families, society and the economy.
Pauline Abernathy, vice president for institute, said in addition to making federal student loans easier to pay back, more must be done at the college level to make sure all students exhaust their federal loan options before seeking private loans that carry higher rates and much less flexibility.
Contact Linda Conner Lambeck at 203-330-6218 or firstname.lastname@example.org. Follow her at twitter.com/lclambeck.