The student loan relief plan President Obama announced on Wednesday as part of his “we can’t wait” for Congress tour rings a lot like the refinancing plan he announced on Monday for underwater homeowners. It allows Obama to take credit for addressing an economic grievance of voters, but is a modest move that doesn't go anywhere near to solving the root of the problem.
In the case of the student lending announcement, the “pay as you earn” part of the plan would accelerate and improve a program to let roughly 1.6 million low-income borrowers cap their loan payments at 10 percent of their discretionary income and forgive the balance of their debt after 20 years. The other piece would be applicable to about 5.8 million borrowers who could save up to half a percent in interest by consolidating Federal Family Education Loans with government direct loans.
Like the refinancing plan, however, the student lending plan is essentially a patch that would be applicable to only a select slice of borrowers struggling with mounting debt, and it has many limitations. The success of both programs relies on their implementation, and they could have a tough time reaching as many as envisioned.
For example, recent graduates who are struggling to pay their loans cannot take advantage of the piece that offers the 10 percent cap on monthly repayments and forgives their balance in 20 years, because in order to qualify the borrower would have to take out a loan in 2012.
A similar existing program has had limited success. It caps repayments at 15 percent but has only reached 450,000 out of roughly 36 million borrowers.
Similarly, borrowers who have only one type of loan or who hold private student loans cannot benefit from the rate reduction since it applies only to those who consolidate Federal Family Education Loans and government direct loans. The offer has a limited window during the first half of next year, and specific details on how to qualify are not available yet.
Consumer advocates who focus on student lending praised the effort as a first step but were plain that the initiative only reaches the tip of the iceberg. It chips away at student loan bills but does nothing to address soaring tuition costs and the scores of recent graduates struggling to find jobs even with advanced degrees.
“Student debt levels have skyrocketed. Hundreds of thousands of student loan borrowers wear a financial straightjacket once repayment begins,” Rich Williams of the U.S. Public Interest Research Group said in a press release.
He commended the initiatives but said more is needed faster. “Tools exist to help borrowers break free from negative consequences like default, but they aren’t aware that these tools exist and they need the tools sooner.”
Despite the limitations, it is hard to argue that Obama has much to lose. Indeed, he stands to gain politically for responding to a critical issue, as student loan debt is now surpassing credit card debt.
Banks and other lenders remain politically unpopular. Their representatives grumbled that the action would force some to accept early payoffs that would limit their earnings, but noted the plan would not delve into the bigger, more lucrative private loan market as some had feared.
Senate Minority Leader Mitch McConnell’s office took a preemptive strike against Obama early on Wednesday by releasing a series of articles that said the administration’s move last year to discontinue the FFEL program (which gave lenders government subsidies for offering student loans) cost the country jobs.
But neither complaint is likely to be heard over the applause for a break for students.
“It’s just one more disdainful smack at investors and Wall Street,” said Charles Gabriel, an analyst with Capital Alpha Partners. But, Gabriel added, “It is smart politics on Obama’s part. It’s a modest political plus. It really responds to those who are beginning to protest about economic inequality in the Occupy Wall Street movement.”