In a speech given at the Auraria Campus in Denver, Colo., Wednesday, President Barack Obama announced a plan that would cap federal student loan payments starting in 2012 — two years earlier than initially expected.
The plan would cap student loan payments at 10 percent of a borrower’s discretionary income — down from the current 15 percent rate — and would forgive loans after 20 years rather than the current 25, according to a White House fact sheet about the plan. The changes would apply to Federal Family Education Loans and federal direct loans.
Additionally, students with both types of loans would be able to consolidate them into a federal direct loan, which could potentially lower interest rates by as much as 0.5 percent, according to the plan.
Obama assured the student-filled audience that their investment in education is worthwhile.
“We want you in school,” he said. “But we shouldn’t saddle you with debt when you’re starting off.”
During his speech, Obama said that graduates overburdened by loans are “painful for the economy” because the money they pay every month “is not going to help businesses grow.”
Obama is bypassing Congress and approving this plan through executive action, which does not require congressional approval.
According to the plan, 5.8 million borrowers currently hold both types of loans. Reducing the payment cap from 15 percent to 10 percent would affect 1.6 million more student loan borrowers.
“We can’t wait for Congress to do its job,” Obama said. “So where they won’t act, I will.”
The option to consolidate loans will be available only for a limited time, and those who apply would receive up to a 0.5 percent interest rate reduction on their loans.
Consolidated loans are less expensive for both borrowers and the federal government because both will have to pay less in service fees, said Nancy Coolidge, coordinator for government relations at the UC Office of the President.
“We’re delighted, and we support both elements of this measure,” she said. “We think this will help borrowers who need relief.”
Borrowers earning under a certain amount per year are eligible for the Income-Based Repayment program. Additionally, those who work in public service or for a nonprofit for the better part of 10 years will have their loans forgiven. Those who do not work in public service would have their loans forgiven after 20 years — five years sooner than under the current program.
According to Coolidge, only half of UC Berkeley students take out student loans, accumulating on average about $16,800 in loans during their undergraduate studies. While these numbers are expected to rise, UC Berkeley students still borrow less than those at other public universities, she said.
The Institute for College Access and Success praised the Income-Based Repayment aspect of the plan.
“With the class of 2011 about to face their first student loan payments, there’s no time to waste,” said Lauren Asher, president of the organization, in a statement.