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.
Let's consider the impact of each of these orders.
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.
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?*
Originally, I did a calculation to estimate whether the average student loan borrower could benefit from this program. Since then, I have learned that this calculation assumed a much broader population of borrowers than will actually be eligible for the program. The White House estimate is 1.6 million borrowers could participate. Any borrower who graduated in 2011 or earlier will not be eligible, so its effect will be felt strictly by those in school now or in the future. For a very lengthy explanation of this aspect of the student loan plan, see this post, written after the criteria was clarified.
Of all these parts of Obama's executive order, the loan forgiveness aspect will have the least impact. By moving the timeline from 25 to 20 years, it could be significant in the long run -- but it won't be felt for decades. Remember, 82% of the current student loan debt outstanding was accrued in just the past decade. So it will be at least another 10 years before any of those borrowers have hit the 20-year mark in their student loan payments.