Obama proposal to help students manage loans

For students worrying if they can pay their student loans upon graduation, the answer may be, “Yes we can!”

Tuesday, President Barack Obama’s administration announced a new “Pay As You Earn” proposal that will help students manage their loans. The program aims to limit monthly loan payments for 1.6 million college students and borrowers, according to a White House statement.

Although Penn has a no-loan policy, according to the Student Financial Services website, loans may be used in the place of work-study and summer jobs, as well as to cover expenses such as health insurance and summer school.

According to Penn’s Student Registration and Financial Services, the default rate for borrowers at Penn is under 1 percent— a favorable rate when compared to the national average of 8.8 percent in 2009, according to a Federal Student Aid study.

VIDEO: Students sound off on student loans

In 2007, Penn announced a new initiative financed by the Making History Campaign, which began in 2008. This new program offers loan-free aid packages for students with family income less than $100,000, and a 10-percent reduction in need-based loans for those from families earning about $100,000.

Obama’s proposal will in turn help students understand “how much in loans [they] have to take out and what those loans will look like when [they] have to start repaying them” after graduation, Rich Williams, a representative from the United States Public Interest Research Group said.

“In a global economy, putting a college education within reach for every American has never been more important… But it’s also never been more expensive,” Obama said in a statement. “That’s why today we’re taking steps to help nearly 1.6 million Americans lower their monthly student loan payments.”

During the 2007-08 academic year, 67 percent of students graduated from four-year colleges and universities with debt, according to a study by the Project on Student Debt published last Thursday. This corresponds to about 1.4 million students who owed an average of about $23,000 upon graduating.

The number of students in debt has increased by 27 percent since 2004, and their debt has increased by 24 percent.

“Looking across the country, there is a sky-rocketing student debt [which is] literally putting students in a straight jacket,” Williams said.

The proposed program will work to educate students about their loans and enable them to “have an apples-to-apples comparison” before even applying, which “will empower students to be better consumers,” Williams said.

It will also help students deal with multiple loans through a consolidation effort, according to the statement.

Currently, about 5.8 million borrowers have two separate loans — a Direct Loan and a Federal Family Education Loan — but with this new program, these loans will be combined and their interest rates will be reduced by 0.5 percent. The consolidation will affect approximately 6 million graduates beginning next January.

“Allowing these borrowers to consolidate multiple loans into one payment clarifies confusion and cuts red tape for borrowers,” Williams said in a statement.

Around 14 percent of Penn undergraduates rely on aid from the Pell Grant Program, which grants money to low-income students based on need, according to U.S. News and World Report.

Pell Grants came under fire last month in the U.S. House of Representatives when Republicans announced a proposal that would reduce Pell Grant funds by $2.3 billion.

On Sunday, the Undergraduate Assembly addressed this proposal and voted to write a letter to the government urging them to preserve the current Pell Grant program.

UA President and Engineering and Wharton senior Tyler Ernst has been working on this initiative.

Like several other students at Penn, Ernst has a friend who is struggling with student loans.

“I think that access to education is a basic right,” Ernst said. But when dealing with loans, students often have to weigh the value to make sure the investment is worth it, he added.

College senior Lindsay Godard believes that it is important for the government to do something to help students.

“Either somehow the tuition [must decrease] or the government somehow [should find] a way to help with student loans,” she said.

Many students within the Occupy movement, which began on Wall Street and spread to Philadelphia last month, are demanding the government and banks to cancel student debt.

Wharton School professor Justin Wolfers, however, believes that canceling student debt would be a bad use of the government’s funds.

In a Freakonomics interview, Wolfers noted that college students are “the one group who we know typically have high incomes … the group who has been hurt over the past few decades is high school dropouts.”

He added that forgiving student debt does not serve as a stimulus for the economy.

“It’s the hand-to-mouth consumers … who are most likely to raise their spending if they get the extra dollars,” he said in the interview.

Obama’s new proposal, however, does not forgive debt but rather seeks to educate students and help them “manage their monthly payment… so students will never be overburdened,” Williams said.

According to Wolfers, programs that increase applicants’ understanding and access to loans could increase access to education.

However, it is important to free graduates from oppressive debt, Williams added. “So many students are at the tipping point, and there needs to be initiatives just like [the one that President Obama] will be proposing,” he said.

Congress has been working for over three years to develop programs to help college graduates deal with debt, Williams said.

Currently, the Income Based Repayment program, introduced in 2007, limits monthly debt payments to 15 percent of their discretionary income. The new proposal will cap debt payments at 10 percent starting 2012.

Under the “Pay as You Earn” program, students’ debt will be canceled after 20 years, as opposed to 25 years under the IBR.

“Steps like these won’t take the place of the bold action we need from Congress to boost our economy and create jobs, but they will make a difference. And until Congress does act, I will continue to do everything in my power to act on behalf of the American people,” Obama added in the statement.

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