To the Rescue of Student Debt Holders?

By: Dr. Lynn Reaser

President Obama announced this week an Executive Order to try to help Americans struggling under the burden of student debt.  A total of 39 million individuals now hold college loans, which totals $1.2 trillion.

The President’s action would extend the number of student borrowers who could quality for the Pay As You Earn program, by including those assuming loans prior to November 2007.  This progblogram caps monthly loan payments at 10% of income and forgives loans after 10 years if employment is in the government or in a nonprofit organization and after 20 years if employment is in the private sector.  So far, only about 1.2 million people have signed up because of a lack of effective marketing and the complicated process involved in enrollment.  For the President’s initiative to have a substantial impact, a campaign to raise awareness will need to be accelerated while the sign-up process will need to be vastly streamlined.

Even with an improvement in participation, there are some significant drawbacks in this approach to reduce the burden of student debt payments.  Holders of student debt can see negative amortization, with their loan balances growing if their resulting payments are too low.  While this was possible before the Executive Order, generating more avenues for students to be in a negative amortization scenario creates a reliance on the forgiveness aspect of this expanded program.  Reduced loan payments and/or loan forgiveness also represent only a transfer of income or wealth from taxpayers to student debtors, not a generation of new wealth or income for the economy at large.

The overall economy would benefit more by subduing the spiraling cost of higher education, by achieving higher graduation rates among college attendees, and by delivering more degrees in fields with better earnings potential.

 Image Credit: Deferred 



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