Obama Plans to Expand Student Loan Forgiveness

Image: Obama Plans to Expand Student Loan Forgiveness

Friday, 10 May 2013 11:46 AM

By Sandy Fitzgerald and David Yonkman

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Billions of dollars in student loans could be forgiven over the next decade, under a proposal in President Barack Obama's budget to expand the program's income-based repayment system.

Student advocates are enthusiastic over the prospect, but critics complain the expansion could extend a program that already encourages young people to borrow too much money and leave taxpayers with their college bills, reports the Wall Street Journal. They also say forgiving debt gives a taxpayer gift to people who need it the least, such as attorneys, doctors, and other white-collar people with graduate degrees.

The program already allows most borrowers with loans issued since October 2007 to make payments equal to 10 percent of their income after taxes and basic living expenses. After 20 years of on-time payments, or 10 years for people working in public or nonprofit jobs, the rest of the balance is forgiven.

The program was originally created in 2007 during the George W. Bush program, with payments limited to 15 percent of income and to continue for 25 years.

Obama wants to open the program to all those who borrowed before 2007 as well, and make the part of the loan that is forgiven become tax exempt, as loan forgiveness is normally considered taxable income.

Advocates say the expansion can help curb rising defaults on student loans without harming households and the economy.

But on Thursday, House Republicans and Senate Democrats introduced bills to replace the current loans' fixed rates with variable rates based on the government's borrowing costs.

The House bill, proposed by Education Committee Chairman John Kline, R-Minn., sets rates higher than those in a plan by Democratic Sen. Richard Durbin of Illinois, but caps them so they don't go over a certain threshold. Without the measures, the rates on some new federal loans could double to 6.8 percent on July 1.

"As I've said time and again, we've got to stop kicking the can down the road with short-term fixes to this interest rate problem," said Kline.

Rep. Virginia Foxx of North Carolina, chairwoman of the Higher Education Subcommittee, added, "Students need more certainty and less confusion about their federal loan interest rates."

The White House complained that Kline's bill does not go far enough. "While we welcome action by the House on student loans, we have concerns about an approach that both fails to guarantee low rates for students on July 1 and asks too many of them to bear the burden of deficit reduction through unaffordable rates," said spokesman, Matt Lehrich.

There is a steep cost for forgiving loans. According to the Education Department, 400,000 borrowers, under the current program, will see an average of $41,000 in student debts forgiven through 2021, for a total of $16.4 billion. Part of the cost will be covered by interest payments on student loans, the department reported.

But economists with Barclays estimated the current program alone will cost the government $300 billion between now and 2020, and the economists have not released an estimate of what Obama's plan will cost.

Student loans for undergraduates are capped at $57,500, but graduate students have no limit, through a "Grad Plus" program that lets them borrow as much as their college charges.


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