While our generation of college students has skyrocketed in terms of attendance and graduation rates, job security is one phrase that has slowly dwindled from our vocabulary. Now, even with a bachelors degree, the job market holds less and less promise for those planning to start a career after graduation. While many companies are downsizing yet mandating a degree upon application, graduates are forced to use their sub-par salaries to repay thousands of dollars in student loans.
What Obama calls the “Pay As You Earn” plan claims to aid graduates by setting up a payment plan based upon income rather than the amount owed on the loan. The president’s proposal will also include forgiveness on a loan paid under the program for 20 years. Basically a fast-track of a program that was scheduled to begin in 2014, this setup closely resembles a plan that many may not know is already in place. Currently eligible candidates can set up an Income Based Repayment (IBR), a payment also based upon income and family size. New York Daily News journalist, Phyllis Furman, explains, “The plan improves on an existing program, reducing a current cap on monthly loan payments by a third, from 15 percent of discretionary income to 10 percent, and forgives any remaining debt in 20 years, instead of 25.”
This new reduction will affect two main groups of debtors. What the administration calls “split-group” borrowers, which include around 5.8 million debtors, will be slightly affected by this program, however, the major scale changes will affect a much smaller minority.
Furman continues, in regards to split-group borrowers, “These are folks who have both federally guaranteed and direct student loans. They get to consolidate into one direct loan program and reduce their interest rate by up to half a percent.” A reduction of “up to half a percent” may not cut it for those owing thousands of dollars, as many of today’s graduates are repaying for decades after earning their degree.
A mix of rising tuition prices, a shrinking job market and the idea that a degree is essential to career success causes a problem that may not be solved by such a small reduction. Though the new plan is not much different from the existing IBP option, the proposal is still beginning to shed light on the very prevalent issue of college debt in America.
Whether innovation or simply an addition, Obama’s proposal does serve to slightly lower the monthly rates already in place for an IBP. This will help to significantly reduce payments for over 1.6 million Americans, the eligible citizens outside of the split-group, according to the Board of Education. Sounds great, right? But with college loan debt burdening 36 million Americans, currently ranking higher than our country’s credit card debt, this plan may only “relieve” a small minority of debtors.
First and foremost, before deciding if this sort of repayment is right for you, it is important to note the criteria of eligibility for the “Pay As You Earn” plan. Generally speaking, according to analysis done by The Washington Post, most citizens will only be eligible if their total debt exceeds their annual income. Aside from income and loan amount being taken into consideration, only certain types of loans are applicable. Seniors? You may be out of luck. Loans under this program need to be taken out after 2008 and continue through 2012 or later. So unless students delay graduation to be eligible, this plan will not affect current seniors. Also, only federal loans can be repaid based upon income. Private loans are not eligible for “Pay As You Earn”, including Parent Plus loans or any federal loans that have been privately consolidated. These restrictions leave a very small group that will remain eligible for aid through this government program.
Though recognizing the significant improvement that this group will share in terms of managing monthly rates, Mark Kantrowitz, publisher of Fastweb.com and Finaid.org, says that the “typical benefit” will only be $3 a month. For those who are not eligible, you may not be missing out. Kantrowitz explains that even the lucky few that are eligible may want to consider the higher interest rate that goes along with prolonged payment. If you don’t fall in the group of 1.6 million, it may be best to keep your loans out of Obama’s program.
For more information on the IBR payment plan already in place, visit www.studentaid.ed.gov.