Obama's Proposed Student Loan Debt Remedy Carries a Hidden Trap

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Students  listen to then national anthem prior to US President Barack Obama's  delivering of the commencement address on May 21, 2012 at Missouri Southern State University in Joplin, Missouri. AFP PHOTO/Mandel NGAN        (Photo credit should read MANDEL NGAN/AFP/GettyImages)
Mandel Ngan, AFP / Getty Images
America's student loan debt problem is nothing new: For years, the media has been offering up a flood of stories about people facing decades of debt repayment and crushing interest rates. But with tuitions still rising and employment options for college grads still stagnating, America's potential "student loan bubble" is making many experts increasingly jittery. President Obama's recent budget proposal includes a new plan to tackle the problem, but some critics worry that it could leave students in even worse shape.

Pay As You Earn, President Obama's first stab at the student loan issue, came late last year. The program caps student loan repayment levels at 10 percent of the borrower's discretionary income, effectively ensuring that recent graduates won't get stuck with brutal monthly payments. At the same time, the program also places an effective limit on the length of repayment: After a student has been paying off their debt for 20 years, the program will retire any debt that remains.

It's a great idea, and could go a long way toward ending the student loan debt carousel that so many workers are stuck on. Unfortunately, there are some rather severe caveats. To begin with, Pay As You Earn is only available to students who have taken out at least one student loan after fiscal year 2011. In other words, people who are already in repayment hell are stuck there.

Also, the program only applies to federally backed student loans, which means that many people struggling under the worst loan debt -- those who took out higher-interest private loans -- are ineligible.

What the President Proposes

Last week, President Obama debuted another balm to ease student-loan miseries, but the remedy is paired with another potentially devastating long-term consequence.
Here's how it would work: Currently, Congress sets a cap on student loan interest rates, but Obama's proposal would peg student loan interest to the market. Under the proposed system, 10-year Treasury notes would be the benchmark for loan interest. The interest rate on subsidized Stafford loans would be the Treasury note rate, plus 0.93 percent; on unsubsidized Stafford loans, it would be Treasury rate plus 2.93 percent; and on loans to grad students and parents, it would be Treasury plus 3.93 percent.

Today, the Obama proposal would be a considerable benefit to students. It would lower the subsidized Stafford loan rate by 0.65 percent, the unsubsidized Stafford rate by 2.05 percent and the grad rate by 1.05 percent. The trouble is that the Treasury note interest rate is currently near historic lows and is almost certain to rise if the economic rally ever kicks into gear. As The Atlantic noted, there are times during the past few decades when -- under the proposed plan -- student loan interest rates would have jumped above 12 percent.

It's also worth noting that Obama's interest rate proposal doesn't do much to address a basic problem of student loan repayment. Students who attend school during economic boom times but have to repay their loans during economic busts could easily find themselves trying to service high-rate loans at the worst possible times. This, incidentally, is a big part of the problem now: Many students who took out loans at 8 percent or higher during the 1990s and 2000s are in repayment mode when interest rates are low and hiring is sluggish.

Ultimately, Obama's policies for college students and recent grads are proving to be a mixed bag. Pay As You Earn has the potential to completely transform the student loan landscape, effectively promising that the next generation of college graduates won't face the same Sisyphean economic task as the one the preceded it. On the other hand, the president's interest rate proposal risks undoing much of the good inherent in Pay As You Earn.

Either way, it won't really matter to young people recently arrived in the job market: Stuck with heavy loans at unserviceable rates, they're likely to remain out in the cold, trying to pay down their debt, without any real hope of escaping a brutal economic treadmill.

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Bruce Watson is DailyFinance's Savings editor. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.


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November 05 2013 at 8:29 AM Report abuse rate up rate down Reply
Eller Anthony

There seems to be no solutions from President Obama or our Congress. I'm from Louisiana and my Senators Vitter and Landrieu both said they voted to keep interest rates low even though that will help and they share my concern? and they seldom agree an anything??? Now it looks our President and Congress can't even agree on that. Please google ProjectTuitionReimbursement I have a theory; Trickle from the Middle Up and Down Theory

I t can be used in different ways my first project is loosely based on The Opportunity Maine Tax Credit and the $5250 Tuition Reimbursement program where employees can go back to school and their employer pays and receives a tax credit.. This bring graduates and small business together. there will be Checks and Balances, Quarterly Reviews little or no waste our our tax dollars. this would create jobs where jobs are needed, would start to rebuild small business again. Please read several posts there are some other suggestions as well Please comment if you like it and tell your friends and if you don't like it comment and tell me why.. We have got to get a conversation going about the solutions!!!

April 18 2013 at 6:56 PM Report abuse rate up rate down Reply
casey5553

obama himself is a hidden trap that so many have fallen for.

April 18 2013 at 4:00 PM Report abuse rate up rate down Reply
antoniocastellano

Every economical idea from Obama HAS hidden traps.

April 18 2013 at 12:48 PM Report abuse rate up rate down Reply
ectullis

The Hidden Trap in Obama's Proposed Student Loan Debt 'Remedy'. Obsama

April 18 2013 at 4:25 AM Report abuse +1 rate up rate down Reply
snosnake18

to the people who need to know wasnt talking about people who cant work. talking about those getting a free ride and polititions busy buying the votes and the liberal media who support these activities never one thought about america spending its self into bankruptsy stealing the spirit out of america and its kids with the liberal socialist programs that we call school now days

April 18 2013 at 1:43 AM Report abuse +2 rate up rate down Reply
snosnake18

nobody forced them to borrow money why am i the taxpayor gettin stuck with the bill but then who really cares about the people who work ?if a job can be found it will be taxed and regulated right out of america only people doing good are those who leach off taxpayors, the big govt people or those who never have looked for a job and those who quit looking. guess its easier for some to live off of others (polititions and liberals love that) then being responceable for ones self liveing the american dream (polititions and liberals hate that) note i make one third what i use to barely above min wage but i pay my own way dont need liberal socialist running my life i value my freedom

April 18 2013 at 1:37 AM Report abuse +5 rate up rate down Reply
Alan

Students have no concept of the debt. They are seduced by colleges and the media. Go to a state college, go closer to home. Work during school. Many in my generation worked parttime jobs to pay for college. be smart about what degree you want and make sure its an employable degree. Find a degree program with a work/study program. Go to a tech school instead. In the future vote for Candidates that encourage industry in the state you plan on living in. Vote for any National Candidate that is entrepreneurial and business friendly--or work for McDonalds when you graduate.

April 17 2013 at 11:21 PM Report abuse +3 rate up rate down Reply
setanta995

Obama's Proposed Student Loan Debt Remedy Carries a Hidden Trap...................................WHOA WAIT A MINUTE HERE....something's very WRONG !
these former @zzz kizzzzing kool aid drinkers SAY SOMETHING NEGATIVE about the mess_i_yuh ?

April 17 2013 at 11:06 PM Report abuse +4 rate up rate down Reply
1 reply to setanta995's comment
apartyof.omg.nojobs

LOOK OUT ! ! N NOW THAT THE MUSLIM CLOWN DID NOT GET HIS VOTES FOR GUN CONTROL ,HE WILL SEND OUT MORE ILLEGAL IMMIGRANT TERRORISTS THAT HE LET "BREAK" INTO AMERICA TO BOMB MORE AMERICANS.

April 18 2013 at 1:02 AM Report abuse +3 rate up rate down Reply
markcartermc

When you borrow money you have to pay it back. This is the biggest problem in our country today. The President says you don't have to pay back you loans. Maybe thats why he spends trillions of dollars of our money that we don't have. More loans, more debt, more interest passed on to those who actually pay their bills.

April 17 2013 at 10:41 PM Report abuse +4 rate up rate down Reply