On Borrowed Time

On Tuesday, the Obama administration announced its new plan for student loans: new graduates can cap their student loan repayments to 10 percent of their monthly income. After 20 years, their debt will be forgiven. Graduates already repaying their loans can consolidate and get half a percent interest rate cut. These changes will go into effect next year, two years before they were already scheduled to do so, and the administration said the move was in response to an online petition drive on its “We the People” site. The high student-debt burden—it will reach $1 trillion this year—is also a centerpiece of the Occupy protests around the country.

The loan plan is clearly a move to ignite college student and recent graduate support, and it’s also a change President Obama doesn’t have to go through Congress to enact. All of which makes this move understandable from a political standpoint.

The problem is that it actually doesn’t do much to help students. The administration and others will trot out numbers saying the plan will save students hundreds of dollars a month. But that’s an unfair comparison to the standard repayment plan. Most low-income graduates can already take advantage of the current income-based repayment plan, which caps repayment at 15 percent of monthly income. The website Generation X Finance crunches the numbers:

So for example, let’s say you just graduated college, have $50,000 in federal loans, and you found an entry-level job paying just $30,000 a year AGI. Under a standard 10-year plan your payment would be about $492 per month. Your discretionary income would be $19,110 ($30,000 – $10,890 1-person poverty level). Divided by 12, that’s $1,593. This means that under the old plan of a 15 percent cap, you would pay no more than $239 per month on your student loan debt. Under the new plan your maximum payment would be around $160. A difference of $79 each month.

That’s only true for a single person. The savings are reduced for graduates in two-income households with only a slightly better income. Now, anyone who’s lived on $30,000 can tell you than an extra $80 a month is a welcome extra bit of money -- it could cover a gym membership, or prescription medicine co-pays, or a cell phone bill. But it doesn’t do much to relieve student-loan debt.

Even more important, the plan does nothing to help relieve private student loan repayments, which have variable, high interest rates making them function like giant credit cards, but which can’t be discharged in bankruptcy.

The share of students with private loans ballooned during the credit boom, from 5 percent in the 2003-2004 school year to 14 percent in 2007-2008. Those loans are also more likely to be used by low-income students, and are more likely to be used at schools with the highest default rates —42 percent of students at for-profit colleges had private loans in 2007-2008. Students who graduate from private or public non-profit colleges and primarily take out federal loans will be most helped by this move, but are also the most likely to leave college in relative fiscal health and are the most likely to get jobs. The for-profit graduates most sucked into an exploitative debt system will be helped the least.

Likewise, federal student loans are the easiest to avoid paying entirely. Deferments and forbearance's hit historic highs in 2009, to a combined 28 percent. Students entering those plans aren’t struggling to repay loans at their current rates, they’re struggling to repay them altogether. The low-income students most likely to take on the risky debt they can’t dig themselves out of would be better off without having to take out loans in the first place—with a mix of expanded government grants, for example, or incentives for schools to recruit and provide financial aid to low-income students from poor districts.

But even middle-class families who send their children to college need better help than this. The cost of tuition continues to grow much faster than inflation—it is an increase of 4.5 percent this year at private, non-profit schools—and for public schools is rising fastest in states with the most fiscal problems, like California. Students attending public colleges would be better helped if their state governments stopped slashing budgets. Parents both today and in the future would likewise be better able to afford school if they had jobs with real wage growth and better benefits. As many commenters have pointed out, it’s even more urgent that we start to have a real national conversation about what colleges should teach students, who benefits most from going, and whether it should be so difficult to get a good-paying job without a bachelor’s degee.

In other words, the problems with student-loan debt are deeply entwined with the problems in our economy overall. If student-loan payers have a little bit more to spend every month then the plan is only a disappointingly meager move to make a slight dent in a big problem. If, however, it serves to quiet the students who are, right now, the loudest in demanding reform, then the plan could do real harm.

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