Obama: Reduced Student Loans

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President Obama amends student loan program without input from Congress.

New Student loan program for students entering college in 2012 will cause less financial burden after graduation.

President Obama’s announcement about student loans should give students more confidence about affording college. He pushed the program originally scheduled for 2014 to 2012.

President Obama announced two major changes to the student loan program. Those who incur student loans will have lower monthly payments, and did so without the “benefit” of Congress.

However, those who finished college already are likely paying 8.25% interest on student loans. Your bank only gives you 1.25%—if you’re lucky.

Effective this January, if you’re someone who has different kinds of loans—guaranteed and direct—you can choose to combine both of them into one direct loan, and bring down your interest rate. You’ll only have to write one check a month. You pay less in student loans, with no cost to taxpayers across the board.

As part of last year’s student loan reform, borrowers’ loan payments could be no higher than 10% of their disposable (after-tax) income. However, this reform was not scheduled to come into effect until 2014.

Once the student loan program is revamped, those who want to attend college will have more money to purchase goods and services, which may provide impetus on bettering the economy.

Most graduates have $20,000 or more in debt. Unlike the U.S. many other countries allow students to attend college free or pay a small annual fee. Even in places where tuition is roughly similar to the U.S., costs are usually lower than American institutions.

A 2010 study from Distance Education.org found:

England charges £3,000 (≈$4,800) for college education.

France charges €165-700 (a maximum of $980.00) depending on the school.

Germany charges €30-600 (≈$42.00-$840).

Canadian citizens pay about $9,000.

Southern Ireland charges €900 (≈$1,270) for an initial registration fee to EU students. Northern Ireland charges the same fees as the UK

In Sweden, citizens and people from other countries are entitled to 12 semesters worth of tuition from the Swedish National Board of Student Aid, which pays approximately €200 (≈$279) per week.

Robert Shireman, former Deputy Undersecretary at the Department of Education and chief consultant at California Competes program, said the administration’s plan would increase confidence among students about post-graduate prospects. It means people can go to college and use federal loans and have confidence that it’s not going to drive them to bad personal situations

One particular concern is the rise of publicly traded for-profit colleges>—such as the University of Phoenix—which often serve non-traditional students and confer degrees online.

Attorney Deanne Loonin at the National Consumer Law Center works with clients mired in student debt. She said president’s measures are a first good step—but suggested broadening the program to help those who already graduated.

In many private colleges the rate of default is higher among students. Loonin noted about 70% of the people she works with at the NCLC, most of whom are already in default, attended for-profit colleges.

There’s rampant fraud in that sector and deception. A lot of people are being deceived into signing up, deceived as to resources, equipment, faculties, and deceived about the prospects at the back end. The for-profit issue is really a consumer fraud issue.

Sen. Dick Durbin (D-IL) praised Obama’s loan proposal, but warned to students to beware of borrowing money to attend for-profit colleges.

Today’s announcement by President Obama is welcome news for the millions of students and recent graduates who are struggling to pay off their student loans. Plans to cap monthly payments, provide greater access to loan repayment programs, aid in the consolidation of student loans and to provide students with more information about financial aid before they go into debt are all important steps to help students manage the skyrocketing costs of getting a degree.

For a growing number of students, this help may not be enough. Students in some for-profit schools are increasingly burdened with massive debt and little to show for their education. Meaningful accreditation standards and safeguards for taxpayer investments need to be put in place to ensure students are getting the best education possible and federal funds are being used fairly and responsibly.”

One group left out of the Obama’s plan is those who struggle to pay off private student debt from lenders such as Sallie Mae and Citibank. Private companies tend to have fewer protections than federal loans and typically have variable interest rates, unless the student specifies a fixed interest rate prior to borrowing.

Rep. Steve Cohen (D-TN) stated President Obama was right to give these students a way to pay these loans off quicker He wants to pave the way for student loans to be discharged in case of bankruptcy, arguing that the 2005 Bankruptcy Reform Bill under President Bush stripped students of the right to declare bankruptcy on private loans.

The industry is giving out loans to people that may not be as creditworthy as they should be—because they know they can’t bankrupt them You ought to be able to discharge those loans through bankruptcy,” he said. “Why should private loans be different than debt you can accumulate with a credit card, or at a casino? There’s just no good reason for it… It was a really bad bill if you were an average or even a middle-class American. This was done for the industry, not the student.

Cohen introduced a measure to the House to allow students to discharge their debts if they declare bankruptcy. He noted, however, that such legislation could fall short in the Republican-led house. We haven’t gotten any Republican support” for the bill, he said, suggesting that Republicans were more interested in helping special interest groups than students.

Robert Shireman, former Deputy Undersecretary at the Department of Education and a chief consultant at the education-oriented California Competes program, indicated special interests and lobbies representing private loan companies have no incentive to reverse the 2005 law.

Lenders would prefer to be able to hang on to those debts in perpetuity, and not give people a fresh start. But, when you go back and look at the history, there wasn’t previously this kind of debate around” the issue of allowing students to declare bankruptcy.

If as a society we want to encourage people to take out student loans so they can invest in themselves, we’re essentially telling them it’s safer to take out a credit card debt than it is student loans,” he said. “I think increasingly people will see that.

Sen. Al Franken (D-MN) affirmed Wednesday that it’s important to help students overburdened by debt, and argued the real problem is the rapidly-rising cost of education.

While the actions taken by President Obama are a great first step toward decreasing federal student loan debt, we also need to address the mounting financial burden that private loans are imposing on students and their families,” he said. “I’ve been pushing for student loan reform since coming to the Senate and I will continue to fight for these changes. But ultimately, what we need to address is the skyrocketing cost of college–families simply can’t afford to go bankrupt over their kids’ education.

Whether Americans with higher education burdened with enormous amount of public debt will also get relief is unknown.

Mad Mike’s America thanks CBS and Distance Education.org

Was your student loan worth the investment?