Obama’s Student Loan Proposal – Pros and Cons

April 15, 2013

The battle is on in Congress over the 2014 budget and student loans are one of the areas that may be impacted as a result – and not for the better! Last week, we wrote that the budget approved by the House plans to eliminate student loan repayment for federal employees, cut Pell Grant funds and slash income based repayment opportunities for federal student loans. None of this is good news for those owing educational debt or currently receiving federal funds for college.

But now President Obama has offered his 2014 budget proposals and it includes several notions on changing student loans – ostensibly with the intent of making them more affordable. Here’s what you need to know. First, Congress can choose to completely ignore any budget suggestions from POTUS since it’s their responsibility by law to draft our national budget.  Second, some aspects of Obama’s proposals may not be the best tact to take long term.

Proposal – Rethink Student Loan Interest Rates

President Obama has proposed shaking up federal student loan interest rates which are currently set by Congress. Subsidized loan rates are now at 3.4% but will double to 6.8% unless Congress intervenes. POTUS proposes to put an end to this annual stress-fest by changing the rates to reflect market interest rates at the time the loan is taken out that would last the life of the loan.

Pros: It would end the yearly Congressional renewal (or non-renewal of rates). It would also allow students to get more competitive rates when market rates are low.

Cons: In times when market interest rates fluctuate widely, students could be saddled with extremely high interest rate debt. There is no cap on interest rates to protect borrowers from excessive debt.

Proposal – Cap Percentage of Income Paid to Student Loans

President Obama has suggested in his 2014 budget proposal that no more than 10% of discretionary income should be devoted to student loan payments. Discretionary income is defined as income in excess of 150% of the poverty level. While it varies by state, for a household of three people, 150% would be roughly $29,295. Income in excess of this amount would be considered “discretionary.”

Pros: This can prevent student loans from crippling our economy and household budgets – especially when students have just graduated and aren’t earning primo dollars.

Cons: If this also doesn’t come with an option that caps the length of repayment and offers forgiveness after that date, this can consign borrowers to a lifetime of debt and astronomical interest payments over time.

Proposal – Expand Pell Grant Program

Congress proposes to cut $86 billion from the Pell Grant Program over the next decade. In sharp contrast, POTUS would like to add $140 to take the maximum grant increasing it from $5,645 to $5,795. The question is with Congress pushing for cuts, is the best we can hope for status quo?

Pros: This will help keep college affordable for those who need federal assistance to matriculate.

Cons: With our national debt sky-high, giving away more money will only up the bill our country owes…

To read President Obama’s full 2014 Budget Proposal, click here.

And if you want to encourage Congress to back off of legislation that would make college less affordable and student loans more onerous for borrowers, be sure to contact your Senators or your Representative to speak your mind!

If you are interested in getting informed and involved in keeping education affordable, here are some of our recent blogs on these issues:

Hey Congress! Reduce Student Loan Interest Rates to Stimulate Our Economy

New Budget Will Make Life Worse for Student Loan Borrowers!

Legislation Alert: Proposed Student Loan Fairness Act Could Work Wonders

4 Student Loan Repayment Reform Models to Consider

Sticker Shock: Student Loan Interest Rates Set to Double this Year!

In addition to providing this blog to keep you informed on college affordability, trends, tuition and more, Tuition.io invites you to try our free student loan tool to help you manage and optimize your debt, check out repayment options and contact your lenders!