By Caroline Fairchild
The Duke Chronicle, Duke U.
(UWire)—President Barack Obama's new student loan repayment plan is set to reduce payments and interest rates, but Duke U. experts and student loan officials are skeptical of the proposal's long-term risks.
The Obama administration announced the "Pay As You Earn" loan repayment plan in October, which will allow 1.6 million students to cap their loan payments at 10% of their discretionary income starting 2012. Despite the benefits of reducing monthly loan repayment, Duke Director of Student Lending Irene Jasper said it is important that students consider how Obama's new income-based repayment plan compares to current repayment options.
"Everyone has stressed the cash flow aspect of the new payment plan and the income-based repayment plan does lower the monthly payment," Jasper said. "But each borrower has to work the numbers to their individual situation to see if they are going to be paying less or more for their loan. Focusing on the monthly payment is only really important when students first graduate and they might not be able to make the repayment."
The White House estimates that more than 30,000 students in North Carolina could lower their monthly payments through the "Pay As You Earn" plan in the next few years. More than 85,000 borrowers could reduce loan interest rates and payments through loan consolidation.
The new plan is just one of a series of executive actions the president is taking with the hopes of strengthening the economy. It will take effect while Obama is in office.
"In tough economic times, we have to step up, and we have to listen," U.S. Secretary of Education Arne Duncan said in a media conference call. "I couldn't be more proud that we could get this done...and announced."
longer payments, increased cost
The Office of Student Loans is still unclear about all the aspects of Obama's new plan and what it means for payment options for students graduating with debt, Jasper said. Because repayment time and cost have an inverse relationship, Jasper said students must be wary of assuming the new Income-Based Repayment plan will automatically reduce the total cost of student loans.
The new plan will forgive the balance of borrower debt after 20 years of payments. "The longer you make payments, the more it is going to cost you," she said. "Depending on the debt and the income level of a particular student upon graduation, it could not be a good solution because in some scenarios the student could actually be paying more for their loans. You need to be careful with the word 'cost.' "
Duke sophomore Jillian Williams has taken out loans through the Federal Perkins Loan Program. With plans to go to law school directly after graduation, Williams is not personally concerned about loan repayment. But having the option to devote a smaller percentage of discretionary income to loan repayment could be an attractive option to some students, she said.
"Being in debt for longer would be more annoying, but it is a constant amount that you can keep track of which is nice from a budgeting perspective," Williams said. "You at least know what you are working with each month and since it is a smaller percentage, it means people have more spending money in the meantime. It sounds like a luxury to be able to pay it off over a longer period of time."
Senior Amanda Arulpragasam has taken out several federal subsidized and unsubsidized loans and said she will graduate with about $50,000 in debt. Arulpragasam is also planning on attending medical school where she will likely take out more loans. Although she said Obama's new IBR plan could benefit her, she would prefer to stick with a standard repayment option and avoid tacking on unnecessary interest to her loans.
"As nice as it would be to free up some cash and have a more comfortable lifestyle, I would rather pay as much as I could so that I wasn't accruing interest on top of everything else," she said. "I am just going to have to live more frugally."
lenders and borrowers at risk
Jacob Vigdor, Duke professor of public policy and economics, said there are clear macroeconomic benefits of freeing up disposable income. But other aspects of Obama's new policy could put both lenders and borrowers at great risk.
Starting 2012, the new plan will forgive the balance of borrower debt after 20 years of payments. This compares to current law, which forgives total debt after 25 years. By allowing borrowers to pay less each month and decreasing the number of years before forgiveness is recognized, the number of students who ultimately default on their loans could increase, which poses a large problem for lenders, Vigdor said.
Students must be wary of assuming the new Income-Based Repayment plan will automatically reduce the total cost of student loans.
"That is a large downside risk," he said, noting that potential negative effects will not be felt until long after Obama leaves office. "The risk is that we are going to have more of these graduates who haven't paid all of their debt in 20 years, so the people who stand to lose in this is the people who loan the money. The people who loan the money are taxpayers and the federal government."
Austin Boehm currently works for Teach for America in Phoenix. Boehm said he understands the dangers of paying the minimum amount toward loan repayment. Although the loans Boehm accumulated while he attended Duke will not be eligible for Obama's lower IBR repayment plan, Boehm is taking on more loans through graduate school. Boehm, who is pursuing a master's in secondary education at Arizona State U., said many of his peers are also adding on to their loan debt in graduate school without much thought for what that could mean for their future.
"I see a lot of students in Phoenix taking out significant graduate loans and just planning on paying that back later," Boehm said. "For a lot of students across America, they might pay less every month to get the benefits on the front end without knowing the costs on the back end. Right now, I might be doing OK with my student loans, but that could very well change in the future."
Even with the risks associated with the president's new repayment plan, Vigdor said Obama will be able to implement the plan relatively easily given the significant period of time before the back end costs of the proposal are felt by borrowers and lenders alike.
"In political terms, 20 years is eternity," he said.