Most of the struggling college graduates who have flocked to Occupy Wall Street protests and posted complaints about their college debt burdens on We Are The 99% Tumblr won’t be helped by two student loan program changes that President Obama is announcing today.
That’s the conclusion of student aid guru Mark Kantrowitz, publisher of the FinAid.org web site. Don’t get Kantrowitz wrong---he said in an interview that he’s glad Obama is making the changes and that “some people will be genuinely helped.” But those winners will be a small minority and won’t, for the most part, include borrowers now in the greatest financial distress.
Meanwhile, colleges and universities continue to raise tuition far faster than inflation and churn out ever more indebted graduates, two reports released by The College Board today show. (Reports here) With states struggling to balance their budgets, the sharpest tuition increases this year were at public colleges; at four year state schools in-state tuition and fees rose an average of 8.3% to $8,244, while total charges (including room and board) rose an average of 6% to $17,131. Private not-for-profit four year college tuition and fees rose an average of 4.5% to $28,500, while total charges, including room and board, went up an average of 4.4% to $38,589. This year’s increases mean that over the last decade, tuition at public four year colleges, after accounting for inflation, has risen an average of 5.6% a year while family incomes have stagnated. Private four year college tuition has gone up an average of 2.6% a year, above inflation, over the decade.
The College Board today also reported a substantial increase in the debt load of students graduating in 2009-2010, compared with the year before. Of students graduating from private four year colleges, 65% had debt, averaging $28,100, up from $26,200 (in constant 2010 dollars) for 2008-2009 graduates. Of those graduating from four year public colleges, 56% had debt, averaging $22,000, up from $20,100 in 2010 constant dollars for 2008-2009 graduates.
So what is the Obama Administration doing now to help? Obama is making two loan program tweaks as part of a series of executive actions he is taking, he says, to help struggling families in the face of Congress’ refusal to adopt his proposed $447 billion jobs bill. “We can’t wait for Congressional Republicans to act,’’ Melody Barnes, director of Obama’s Domestic Policy Council said Tuesday in a conference call with reporters to preview the student loan changes. (On Monday, to kick off the executive action campaign, the Obama Administration announced a plan to help families who owe more than their homes are worth refinance at today’s rock bottom mortgage rates.)
The first of Obama's executive changes could be a help to as many as 1.6 million current students (both undergraduates and some graduate students) who take out new loans in 2012 and 2013---if, that is, they later earn too little to pay back those loans in full. The second change will be of some help to potentially 5.8 million of the 36 million Americans who now have outstanding federally guaranteed student loans---but it won’t be available to those who are already delinquent or in default on loans and it won’t help borrowers with any private student loans they took out.
The 5.8 million have both Direct Loans originated by the federal government and federally guaranteed Federal Family Education Loans (FFEL) originated by private lenders such as Sallie Mae (SLM Corp.), Bank of America, Wells Fargo and JPMorgan Chase. (The Democratic controlled Congress kicked private originators out of this business as of July 1, 2010, so all new guaranteed loans are now Direct Loans.)
Beginning on Jan. 1, 2012, provided they’re not delinquent or in default on their loans, borrowers with both FFEL and Direct Loans will be able to consolidate them all through the Federal Direct Consolidation Loan program. (If you’ve never heard of Direct Loans or FFEL loans, these guaranteed loans are also known as Stafford loans.) Borrowers can save “up to” 0.5% on their interest rate, the Administration says. But this is not a giveaway---borrowers aren’t being allowed to refinance at today’s rock bottom interest rates. Indeed, most guaranteed federal student loans taken out since July 2006 have carried a fixed 6.8% rate meaning those consolidating would typically pay 6.3%.
Moreover, even that 0.5% break is not all it’s cracked up to be. The government is cutting a special 0.25% rate break on FFEL loans brought in for consolidation. The other 0.25% savings, Kantrowitz said, would apparently be realized if borrowers take advantage of an existing provision that allows for a 0.25% discount when consolidators have monthly payments automatically debited from their checking accounts.
There’s another, for some borrowers more significant benefit to consolidating with the government: It makes a borrower eligible for the federal government’s Income-Based Repayment (IBR) program. Under IBR, students can limit their monthly loan payments to 15% of their “discretionary” income---meaning family income above 150% of the poverty line. If, after 25 years of such payments, they haven’t paid off all their debts, the balance is forgiven. In addition, those who are employed in the government or not-for-profit sectors can have unpaid debt forgiven after 10 years of payments. So, for example, Kantrowitz notes, a public school teacher earning $35,000 who took out $60,000 in guaranteed loans to earn an undergraduate and Masters degree might get considerable relief. Currently, fewer than 450,000 borrowers are using IBR, even though Kantrowitz figures at least 10% of borrowers (meaning more than 3 million) would benefit. (Kantrowitz suggests if your debt exceeds your annual income, you might benefit from IBR.)
But here’s the catch: many of those with the most onerous debt loads have private (non-federally guaranteed loans) as well as Direct and FFEL loans. That’s because the amount that can be borrowed under the guarantee program is limited and was even more so in the past. According to the College Board, between 2005 and 2008, about a quarter of college loans were of the private variety. But private loans the government hasn’t guaranteed aren’t eligible for either Federal Direct Consolidation or income-based repayment. (This year the maximum Stafford loan a freshman can take out is $5,500, while a sophomore can borrow $6,500 and a a junior or senior $7,500. A graduate student can borrow up to $20,500 a year. )
Another angle: Some of the 5.8 million who qualify for the consolidation could save more by not consolidating, Kantrowitz says.. That’s because these individuals have a mix of recent “subsidized” undergraduate loans and non-subsidized ones. Subsidized undergraduate loans issued last year carry a 4.5% rate after a student graduates, while those issued for this school year carry a 3.4% rate. Students who have these loans might be better off keeping their loans unconsolidated and paying off their higher rate, unsubsidized borrowing first---assuming they’ve got the extra cash to do so.
Okay, so what about the change affecting new 2012 and 2013 borrowers? Last year Congress passed a change in the income-based repayment program that was to take effect January 1, 2014. It reduces the IBR payment to 10% of discretionary income (down from 15%) and the repayment period to 20 years, down from 25 years. (The special 10 year deal for public and not for profit workers continues, but they too get the lower 10% of discretionary income rate.)
Since the government’s costs of borrowing are so low, if will be making a “profit” from the loan consolidators, points out Kantrowitz. The Obama Administration is using those extra dollars to move up the start of the new, more generous IBR program to January 1, 2012. Department of Education spokeswoman Sara Gast explained today that the 10% repayment rate will be available to anyone who takes out a new loan after Jan. 1, 2012, and has no loans that predate Jan. 1, 2008. Here's the key: That means that both current undergraduates and those in graduate school (if they have no pre-2008 loans) could benefit.
