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July 15, 2014January 14, 2015Kate Swain

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The True Costs of President Obama’s Student Loan Plan

July 15, 2014January 14, 2015Kate Swain

In June, President Obama signed an executive order intended to ease the burden of student loan repayment for millions of young Americans. The action extends to borrowers the ability to cap monthly payments for certain federal student loans at 10% of the borrower’s discretionary income as of December 2015. Applying to those who took out loans before October 2007, this action would benefit about five million indebted students.

Obama’s action also includes a Pay as You Earn program which would forgive loans after twenty years. Special bonuses apply for borrowers working in designated public service jobs, including employment through a federal, state, or local government organization, or a nonprofit that provides some specific public services, such as public education, law enforcement, public health or legal services. Upon meeting these conditions, dismissal of a student’s loans can occur after only ten years.

Education Secretary Arne Duncan’s alarming assertion that while the federal government does not yet have an estimated cost for Obama’s plan, he is certain it will “figure that out on the back end,” should be a source of concern in itself. Duncan claims that the combined aspects of plans from Obama and Senate Democrats would enable 25 million borrowers to refinance their outstanding loans, forgiving the average student of about $2,000.

That $50 billion total burden does not just disappear. This conservative cost estimate from the administration means that the weight of loan forgiveness will no doubt fall on the shoulders of taxpayers.

And the rising costs do not stop there. Subsidizing student loans in this way gives college administrations extra room to ramp up tuition costs and launch pricey projects that often fly under the radar. In this way, the student loan crisis starts to look a lot like the progression of the 2008 mortgage market bust.

President Obama’s executive action failed to address the core of the problem: the ever-increasing cost of college itself. Some economists have argued that increasing government funding and loans without addressing the steep tuition hikes has made college less attainable because of the upward pressure on price.

While proponents of Obama’s proposal claim it will calm borrowers by lessening the burden of student loans, supporters must realize that this action alone may encourage colleges to hike up tuition even further. This hurts the very students it aims to help, as higher costs lead to more debt and difficulty paying off loans. The Department of Education reports that default rates on student loans rose to 14.7% in 2013. With policies that enable tuition increases, we can expect default rates to continue to soar, creating negative consequences for borrowers.

Tuition prices continue to increase at double the rate of inflation. According to the College Board, 88% of undergraduate students at public colleges and 70% of full-time undergraduates at private, nonprofit institutions faced increased tuition costs in the 2013-2014 school year. The White House observed, “Over the past three decades, the average tuition at a public four-year college has more than tripled, while a typical family’s income has barely budged.”

States are also subsidizing public higher education less. States are spending 23% less per student on average, with all but three states spending less per student in 2013 than they did in 2008. As states make cuts, colleges compensate by passing the bill to students.

The federal government holds the majority share of the student loans market. The Consumer Financial Protection Bureau estimates that more than $1 trillion of the overall $1.2 trillion of outstanding student debt comes from federal student loans. This number does not account for all college costs incurred by families, who may use other lines of credit to finance the ever-climbing cost of higher education. Federal dominance in student loans began with a 2010 provision that dictated all new federal loans would occur through direct loans, rather than through agreements with private lenders.

More urgency should be placed on increasing financial transparency to help control climbing tuition costs. The first step could be requiring schools receiving federal support to provide descriptive statements explaining any escalation in tuition, along with plans of action to prevent future increases. Reining in the price of college via transparency will cut the problem from its root; on the other hand, subsidizing student loans without addressing rising tuition expenses perpetuates a nasty cycle of snowballing costs.

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