Obama’s Student Debt Plan: Does It Solve the Core Problem?


Love ‘em or hate ‘em, millennials are in a tough spot. The New York Times highlighted their predicament twice this week alone: notably in an article about living with student loan debt in New York and an apology to millennials. I myself was pretty darn lucky to graduate just a few years ahead of the millennials; a lucky accident that sent me off on a far better career path than I might have had otherwise. But what about those who weren’t so lucky? What about those who are struggling with high student loan payments and meager employment prospects?

For them, President Obama is proposing a solution that would cap their monthly student loan payments at 10% of their income. This plan is an expansion on the Pay As You Earn Program and intends to make large student loan payments more manageable. But does it solve the core problem?

The Executive Order and The Problem It’s Meant to Solve

Graduation season is upon us and President Obama rang it in with an executive order on Monday that will cap student loan payments at 10% of a borrower’s income. This is an expansion on the Pay As You Earn Program that will open the door to 5 million more borrowers, starting in December 2015.

For those struggling to find full-time work or those struggling to make their payments, this will be a welcome initiative.

What’s more, President Obama also intends to support Senator Elizabeth Warren’s proposed legislation which would offer today’s interest rates to new borrowers wishing to refinance in the future. While speculation suggests this bill is unlikely to pass, it’s clear that the focus on making student loan debt more manageable is becoming a key issue for policymakers.

Student loan debt has been crushing young professionals – and even the sandwich generation – for years. And now there’s more data to prove it, as highlighted in a recent article in CNN Money:

“Two years out of college, half of graduates are relying on their parents or other family members for some sort of financial help, according to research from the University of Arizona. The study tracked more than 1,000 of its students over the course of five years — from when they entered college in 2007 to 2013…

Whether they rely on their parents for every single expense or just need a little help here and there, many graduates say their financial situations have caused them to postpone certain life goals — like getting married, having children or buying a home.”

As if that weren’t bad enough, only half of these graduates have been able to find full-time work, thus making it that much more difficult to get ahead. This struggle isn’t just a strain on graduates and their parents. The economic factors of an entire generation putting off life goals such as marriage, children, and home ownership can have far reaching effects.

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Does The Action Solve the Greater Issue?

While there’s no question about the fact that something has to be done about the crushing student loan debt so many are facing, this solution doesn’t cut to the core of the problem: the seemingly limitless increases on college tuition. If something isn’t done to cap the price of college from year to year rather than simply capping monthly payments, we’re likely to see more bandaids like this being placed by many more administrations to come.

In the meantime, it’s up to each and every person struggling with their debt to find the best solutions possible to get ahead of their student loan debt. Here’s how:

Be aware of initiatives available to help
One of the problems of this initiative, as highlighted in an article by The Atlantic, is that simply not enough people utilize it. A program can’t help anyone who isn’t aware of it, which is why it’s important to stay up to date on initiatives like this. Take advantage of resources like:

  • Personal finance blogs
  • The Federal Student Aid website
  • Google alerts – which you can set for “student loans” so you don’t miss a thing

Understand the pricey consequences of the Pay As You Earn Program
The Pay As You Earn Program is meant to lower monthly student loan payments for those who are truly struggling to make ends meet. This program is excellent at meeting this goal. However, the Pay As You Earn Program won’t shorten your ultimate student loan repayment time. In fact, it can lengthen it.

By lowering your monthly payments, The Pay As You Earn Program actually keeps you in debt longer. Each monthly payment will have a lower impact on your principle balance (likely covering interest only, if that). The only way to prevent this program from keeping you in debt longer is to 1) only use it as long as you need to and increase your payments as soon as you’re able, or, 2) stay on track for student loan forgiveness, which you can be eligible for after 20 years of consecutive payments (10 years for those using the Public Service Loan Forgiveness option).

Make all of your payments on time, every time
Whether you take advantage of the Pay As You Earn Program or not, it’s extremely important that you make every single payment on time – no exceptions. If you’re hoping for forgiveness after 20 years, you will only get it if you make 20 years of payments on time. One late payment sends you right back to the beginning.

If you’re not using this program, you’ll still want to make all payments on time as late payments get reported to the credit reporting bureaus. If that happens, your credit score will go down, you could face default, and you could have trouble being able to borrow (or borrow at reasonable interest rates) for future purchases such as a home or car. The effects of even one late student loan payment are too dangerous to gamble with.

Success with Student Loan Repayment Comes Down to You

As someone on her own 20 year student loan repayment plan, I couldn’t be more excited about new initiatives proposed by the government to help other borrowers. However, no solution is perfect. Until the costs of college are capped at a reasonable rate, the true solution will come down to you. Only you have the power to improve your current situation. It’s time that we banish the brand of being the Lost Generation and take back our dreams.

Image Credit: Agnes Scott College

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  • BW

    So the answer to rising tuition is to cap college costs? I disagree. Did they “cap” housing prices when those got out of hand? Nope. They just stopped letting everybody qualify for home loans and home prices came down as the demand did. The same thing is happening to higher education. The reason tuition is out of control is because everybody can get a student loan. It’s also the reason a bachelor degree is the 21st century’s High School diploma. Everyone has one so it doesn’t MEAN anything. It’s the same reason there are “for profit” colleges in every strip mall in America…because student loans are too easy to obtain. When there is too much cash chasing a good/service, prices rise. Turn off/reduce the student loan cash faucet and students will borrow less (or not go to college, or ideally – be more price selective of WHERE they go) and tuition will come down due to competition for REAL dollars (vs. Sallie Mae Monopoly Money). I know that it’s political suicide to even suggest limiting access to student loans, but it’s how you REALLY fix rising tuition costs.

    • Shannon_ReadyForZero

      Thanks for your comment! Those are all fair points. I focused on the increase of college tuition because that is a very direct way to mitigate the cost of student loan debt for future students. In my experience, rates went up alarmingly fast while I was already well into my education, after which I either had to use more loans to pay for my last year and graduate – or not graduate and be faced with less career opportunities and a great deal of money wasted. However, a holistic solution that includes a variety of measures taken will be required to make college affordable, available to those who need it, and deemed as more valuable than a high school diploma.

  • Dee

    You’re right that rising college costs is a major contributing factor, but the other factor that I would have liked to see this executive order address is the woeful lack of public financial knowledge about student loans in general. That and I would like to see there be more stringent requirements as to who can take out how much in student loans to begin with- more akin to the type of process that folks have to go through in order to get a mortgage these days.

    • Shannon_ReadyForZero

      Good point, Dee! Information on student loans and how they work is unfortunately often found by students too late. In my perfect world, students would start learning about how student loans work in their junior and senior years of high school and private student loans would be avoided as much as possible – since they come with rates that can reach that of credit cards and are the hardest to pay off.

  • KM

    What I’m not understanding is why isn’t there a discussion about student loans, private or federal, needing to have capitalized interest? That is mainly what is killing those of us with this debt. I am overpaying my student loans by hundreds of dollars each month just to see a small dip in the balance and it is soul-crushing every time I look at my statement. Is there a real reason for capitalized interest to be the standard on these loans? Why not simple interest which seems to be the standard for most car and mortgage loans.

  • Hoffage

    This article is a little bit out of date. What it fails to mention is that at the end of your 20 year term, unless you work in a public-service role, any unpaid loan will be considered taxable income by the IRS. If you are in the position where you are actually solvent at that point, have a house or other assets, then good luck negotiating with the IRS.