Last week, a new plan was announced to help student borrowers pay back their college loans at an affordable rate. According to the Obama administration’s recent press confererence, students will be able to satisfy their loans by paying back just 10% of their income for just 20 years. Current payback programs allow students to pay 15% for 25 years, and this change in the terms can help save money for millions of recent graduates.

In addition to new, more favorable payment terms, borrowers may be able to consolidate their private loans with subsidized ones under a public plan with lower interest rates. When combined with the new maximum repayment plan, a lot of money can be saved by borrowers without costing too much to the government since lost revenue is offset by declining subsidies and payments to private loan originators. While some Republican legislators have questioned Obama’s authority to enact this plan, the terms of repayment are largely set by the executive bureaucracy rather than directly by legislation.

A few drops in a very large bucket

Unfortunately, according to some estimates, there are still a trillion dollars worth of student loan debt to be repaid. Reuters puts the number at a “more managable” $550 billion, but either way the amount of debt students are graduating with puts quite a bit of pressure on their ability to accept lower-paying jobs and reduces the amount of consumption they can contribute to the already sluggish economy.

Many students find they have little choice but to drop out or finance their college degrees with borrowed money. Even at state-subsidized public universities, students are graduating with an average debt greater than $20,000. Current average borrowing rates at the more expensive private schools is a bit harder to calculate definitively, but it is almost certainly higher than the levels at the relatively cheap public universities.

Staying out of debt gets harder, too

Tuition rose an average of 8.3% this year and many scholarship and grant programs have been cut due to state budget problems, low levels of charitable donations, and poor returns on investment funds designed to enable such programs. Futher complicating matters is a persistently bad employment rate that means many students won’t be able to find jobs at all until they’ve got that degree.

It is tough out there for everyone right now, but students have to be extra careful because the financial decisions made in college can stick with you for a very long time. Not only will all loans eventually need to be paid back, but the decisions about majors, study habits, and activities will have a huge impact on job choices and career development. So good luck and be careful!

One Response to “Obama’s plan reduces student loan burden… a little”

  1. Some great advise there, will also be applicable in the uk where fees are rising and grants being cut.

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