NCPA - National Center for Policy Analysis

Obama's Student-Loan Order Saves the Average Grad Less than $10 a Month

October 28, 2011

Of the many long-term problems the U.S. economy faces, student loans are a big one.  Education costs are rising very quickly and incomes aren't.  As a result, students will have to borrow more and more money to obtain university degrees and will have a tougher time paying their loans.  President Obama seeks to respond to this problem with an executive order, yet his effort isn't like to have much impact, says Daniel Indiviglio, an associate editor at The Atlantic.

His order contains three separate components.

  • He will assist borrowers with direct government loans and government-backed private loans to consolidate their balances, cutting the effective rate on student loans by up to 0.5 percent.
  • He will further limit the amount of student loan payments from 15 percent of a graduate's income to 10 percent.
  • Debt forgiveness will kick in at 20 years instead of 25, as it is now.

It bears mention that the second and third components of this order were already set to be implemented by legislation in 2014, and that President Obama's executive order has simply bumped up the time horizon.  Regardless, the aggregate effects of these reforms, even following the somewhat optimistic estimates produced by the White House, have little potential to bring about real change in the student loan sector.

Within the first component, a 0.5 percent decrease on the effective rate on loans will do little to alleviate the financial burden of loans on recent graduates.  Over the past 10 years, the average student loan debt varied from $17,464 to $27,204 -- meaning that with a 0.5 percent decrease in rates the average graduate stands to gain between $4.50 and $7.75 per month.  This is hardly a financing breakthrough.

The final two components also do little to relieve the problem.  These components can neither reverse the spiraling costs of higher education, nor can they drastically reduce the payments that students make on their loans.  Therefore, the executive order (which might not even stand if it is challenged in court) will likely do little to change the system of higher education financing.

Source: Daniel Indiviglio, "Obama's Student-Loan Order Saves the Average Grad Less than $10 a Month," The Atlantic, October 26, 2011.

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