Although some student loan holders could have an easier time paying back their debts now that President Barack Obama has reworked the post-graduate loan structure, some university officials and students questioned whether the measure is worthwhile in this critical economic climate.
Using executive authority, Obama announced last week a series of actions tailored specifically to college graduates to make their financial lives less stressful, including offering different loan consolidation options, forgiving debts sooner and capping monthly payment amounts. Although the Obama administration boasts that more than one million students will be affected by these reforms, university officials said student loan holders should be cautious moving forward with the new options because they complicate a convoluted process even further.
Additionally, some critics have said the restructure is too costly and does not affect enough students to justify potentially increasing the nation’sdeficit, which now stands at $1.3 trillion. According to Financial Aid Director Sarah Bauder, more than 12,000 students at this university use a federal loan, a private loan or both — but the criteria for Obama’s alterations are so limited it is unlikely many loan holders will be drastically affected.
One of the new measures, available to loan holders in January, will offer students the chance to consolidate two specific types of federal loans, allowing them to write just one check a month instead of multiple ones. Though Bauder said this option sounds appealing on the surface, loan holders should be wary and understand that consolidation can alter interest rates or even the actual amount of the loan.
“Any time you consolidate a loan, all of the original terms are gone,” she said. “[Students] really need to look into what they are giving up and what they are gaining.”
And student loan holders agreed that while combining payments could help the burden of students shouldering two or more loans, consolidation is far from a cut-and-dry process.
“A lot of people don’t fully understand what they’re signing, and then they end up in trouble,” said junior English major and federal loan holder Scarlett Gragan. “They aren’t informed about the possible negative repercussions.”
Obama’s plan also offers increased debt forgiveness. Previously, under the Income-Based Repayment Plan, students’ remaining debt was eliminated after 25 years of payments. This new measure, however, reduces that time to 20 years. And as a bonus for those working in public service as teachers, nurses and military members, debt forgiveness will occur in just 10 years.
University officials said giving students incentive to work as public servants was a step in the right direction.
“I think that’s a great initiative on that end,” Bauder said. “That intent is absolutely well placed.”
And in an additional effort to increase affordability, a new measure also allows recent graduates to pay a maximum of 10 percent of their annual discretionary income toward loan payments. Currently, the ‘Pay as You Earn’ initiative, which Obama instated in 2010, offers a 15 percent income cap for loan holders. But given the job market’s slow growth, Obama’s measure seeks to help those with limited incomes or unemployment manage loan repayments. This measure will take place July 1, 2014.
Obama’s overall intention to encourage people to go to college and recognize its growing affordability is admirable, Bauder said. But both administrators and student loan holders agreed the new actions could spur negative behavioral changes. And some measures — such as the measure to forgive debt sooner — could just increase the nation’s deficit.
“While we’re sitting here trying to reduce indebtedness for students, there’s some enactment here that says, ‘It’s okay to borrow,'” Bauder said.
And others questioned whether these measures would lead people to be financially irresponsible.
“Are we giving people a break or are we teaching them to treat student loans like people treat credit cards, where it’s the expectation of, ‘I’ll just spend it because I don’t have to pay it back?'” Gragan said.
marcot@umdbk.com
