Student loan debt finally outpaced credit card debt and will hit $1 trillion before the end of the year. Clearly our nation faces a student loan problem that needs immediate attention. Thankfully, the White House is taking action.
President Barack Obama signed an executive order that will help millions of individuals with student loans. Starting in 2012, the maximum monthly federal loan payment will be capped at 10 percent of a person’s discretionary income. Borrowers currently pay up to 15 percent.
Those who have both a Federal Family Education Loan as well as a Direct Loan from the federal government will be able to consolidate those loans and shave up to 0.5 percent off their interest rate. One easy, lower payment is designed to help prevent students from defaulting on student loans.
According to numbers from the White House, these policy changes have the potential to affect 1.6 million and 5.8 million people, respectively. In addition to these two changes, the executive order will also lower the time for debt forgiveness. Currently set at 25 years, all of a borrower’s loans will be forgiven after 20 years of payments.
Last year, Congress approved the same plan outlined in Obama’s executive order, but it will not take effect until 2014. The president’s executive action will affect many students currently in college.
Hopefully these plans will help prevent defaults among ASU students. In recent years, the University’s default rate among students rose almost a full percentage point. This left almost 4 percent of recent ASU graduates defaulting on their federal loans in fiscal year 2009.
This will come as a boon to current college students and recent graduates. It will leave more money available to young people that can either be spent or used to pay off other debts.
Getting rid of debt is a key factor in economic growth. The more debt individuals accumulate, the more they spend on payments. For the economy to recover and companies to start hiring again, people need to spend money. Lower payments will put more spending money in borrowers’ wallets.
Smaller payments will also help if students cannot find a well-paying job right after graduation.
The chances of graduates finding a job, though, is reasonably high — even though the national unemployment rate stands at 9.1 percent, it is much lower for those with at least a bachelor’s degree. That number stands at 4.2 percent (for those 25 years or older).
In this economy particularly, it literally pays to have a college education. Even people that have some college or an associate degree have an unemployment rate double those who graduated from college.
While people still can’t file for bankruptcy if they default on student loans, the easing of these rules will no doubt help many Americans in debt from their education.
No doubt there will still be some irresponsible people who take out more than they can pay back, as there always will be. Hopefully, though, this executive order will cause less people to default and put more money in the pockets of young Americans.
Click here to subscribe to the daily State Press newsletter.
