Proposed Student Loan Solution May Trap Some Students

The problem of student loan debt in America is old news: The media has always been a deluge of stories about people who face decades of debt repayment and the crushing rate interest. Now tuition fees continue to rise and employment opportunities for college graduates still stagnant, the potential "student loan bubble" of America that many experts increasingly nervous. Recent budget proposals President Obama has a new plan to address the problem, but critics fear it could leave students in a worse state.

Pay As You Earn, the first attempt by President Obama on the issue of student loan, came last year. Program levels caps student loan repayment at 10 percent of discretionary income of the borrower, effectively ensure that new graduates will not be stuck with brutal monthly payments. At the same time, the program also provides an effective limit of the repayment period: After a student has paid their debt for 20 years, the program will remove any remaining debt. This is a great idea, and could go a long way towards the end of the carousel student loan debt that many workers are stuck on. Unfortunately, there are some caveats rather severe. For starters, Pay As You Earn is only available for students who have taken at least one student loan after the year 2011. In other words, people who are already in hell redemption are stuck there. In addition, the program applies only to student loans backed by the federal government, which means that many people are struggling in the worst debt loan – those who have contracted private loans high interest rates – are not eligible .

That the President proposed last week, President Obama debuted another balm to relieve the miseries of student loans, but the cure is paired with another potentially devastating long-term consequence. Here’s how it would work: Currently, Congress sets a ceiling on interest rates on student loans, but the proposal Obama ankle student loan interest on the market. According to the proposed Treasury bills to 10 years as a benchmark for mortgage interest system. The interest rate on subsidized Stafford loans rate is the rate of Treasury note plus 0.93 per cent, on unsubsidized Stafford loans, it would be the Treasury rate plus 2.93 percent, and the loans for graduate students and parents, it would be the Treasury, plus 3.93 percent. 

Today, Obama’s proposal would be a significant advantage for students. It would lower the subsidized Stafford loan rates by 0.65 percent, the unsubsidized Stafford 2.05 percent rate and graduate rate of 1.05 percent. The problem is that the interest rate of the Treasury note is currently near historic lows and it is almost certain to increase if economic rally never gives fishing. As noted the Atlantic, there are times in recent decades, when – under the proposed plan – the student loan interest rate would have jumped above 12 percent. It is also interesting to note that the proposed interest rate Obama does not do much to solve a basic problem of student loan repayment. Students who attend school during the boom times, but must repay their loans in times of economic recession could easily end up trying to high interest loans services times worse. This, incidentally, is a big part of the problem now: Many students who took out loans to 8 per cent or more in the 1990s and 2000s are in repayment mode when interest rates are low and hiring is sluggish.           In the end, Obama’s policy for students and new graduates are proving to be a mixed bag.

Pay As You Earn has the potential to completely transform the landscape of student loans, effectively promising that the next generation of college graduates will not face the same task of economic Sisyphus like that before. On the other hand, the proposal of the President of interest rate risks undoing much of the good inherent in Pay As You Earn. Either way, it will not really matter for recently arrived on the youth labor market: Stuck with loans unusable heavy metals, they are likely to remain out in the cold, trying to repay the debt without real hope of escaping a brutal economic treadmill.

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About defaultprevention

Default Prevention Specialist since 1998.
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