Obama's Student-Loan Order Saves the Average Grad Less Than $10 a Month

The monthly impact of the president's new effort for most Americans paying off college debt will be between $4 and $8

615 students studying Sterling College flickr.jpg

This post has been corrected (see note below).

Of the many long-term problems the U.S. economy faces, student loans are a big one. Education costs are rising very quickly and incomes aren't. As a result, students will have to borrow more and more money to obtain university degrees and will have a tougher time paying their loans. President Obama seeks to respond to this question with an executive order in the next part of his "We Can't Wait" unilateral stimulus effort. While the president's heart may be in the right place, his effort isn't like to have much impact.

The Problem: Student Loans' Crazy Growth

The cost of college is growing rapidly. That wouldn't be a problem if incomes were growing as quickly as tuition and fees. They aren't. In order to cope with the growing expense of college, more students are relying on bigger loans. The chart below demonstrates the problem pretty clearly:

student loans v disp inc 2011-q2.png

You can see that student loans have grown by 511% since 1999. Meanwhile, disposable income has grown by just 73%. As this chart also shows, most outstanding student loan debt (82%!) was accrued by students over just the past decade.

Obama's Executive Orders

The president seeks to make the situation a little bit easier for some of those graduates. He will create an executive order that has three components.

  • He will clear the way for borrowers with direct government loans and government-backed private loans to consolidate their balances. The White House estimates that this will cut the effective interest rate on student loans by up to 0.5%.
  • He will limit the amount of student loan payments to 10% of a graduate's income. (Currently, the limit is 15%.)
  • He will allow debt still outstanding after 20 years to be forgiven. (Currently, forgiveness occurs after 25 years.)

Those last two orders are really just the president moving up the timeline of existing legislation. Both changes are set to go into effect in 2014, but the president will order that they go into effect as of 2012.

The Impact

Let's consider the impact of each of these orders.

Consolidation

The first would clearly be the most significant, because it is aimed at helping more student loan borrowers. How much would an interest rate reduction of up to 0.5% affect payments?

For the average borrower, the impact would be small. In 2011, Bachelor's degree recipients graduating with debt had an average balance of $27,204, according to an analysis done by finaid.org, based on Department of Education data. That average has ballooned from just $17,646 over the past decade.

Using these values as the high and low bounds of average student debt over the last ten years, the monthly savings for the average student loan borrower would be between $4.50 and $7.75 per month. Clearly, this isn't going to save the economy. While borrowers with bigger balances would save more, this is the average. And even someone with $100,000 in loans would only cut their monthly payments by $28.50.

Payment Limits

As mentioned, the government already has a program for borrowers to reduce their student loan payments to a ceiling of 15% of their income. At this time, just 450,000 borrowers are participating. How many others would benefit from the 10% cap?*

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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