President Obama has just rolled out another controversial plan. His plan is to cap student loan repayment rates at 10% of the debtor’s income that is over the poverty line. On top of that, he then plans to limit the life of the loan to 20 years.
While this plan will, undoubtedly have students singing – it offers little chance that most students would ever have to fully repay their student loans. If a student, for instance, borrows $200,000 from the government to pay for her college education, and then takes a relatively low paying job when she graduates, her payments will be limited to 10% of that low paying job. Nevermind that she owes $200,000.
If she’s making $25,000 a year, for instance, she will only have to pay back $1,411 a year after the $10,890 poverty level income is subtracted. After 20 years, she’s only paid back $28,220.
Encouraging Certain Goals
Certainly, paying for college has become incredibly costly; this plan, however, encourages graduates to take low-paying positions and it almost guarantees that the government will only see a small fraction of the money that it loans to students.
One goal of the program, of course, is to put more money back into the economy. Participants will find more money in their pockets, which Obama hopes will then be used to buy goods and help the economy.
Obama also signed an executive order yesterday to move up the student loan reform that was supposed to take effect in 2014. This reform will reduce monthly payments for 1.6 million borrowers. The plan, now, is for the debt relief program to begin in January.