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Report: Federal Student-Loan Program Plagued by Costly Loopholes

By    |   Monday, 22 Oct 2012 07:45 AM

The Obama administration’s student-loan program should be tightened to close loopholes that encourage excessive borrowing and do not distinguish between needy students and those with means, a new Washington-based think tank report concludes.

The New America Foundation, a nonprofit, nonpartisan policy institute, said means testing for financial aid could help ease the shortcomings of the loan program.

“It sort of indiscriminately provides benefits,” Jason Delisle, director of the New America Foundation's Federal Education Budget Project and co-author of the report, told Yahoo. “This is the more you borrow, the more you can have forgiven.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

President Barack Obama’s proposal to lower student-loan debt hinges on the federal student loan program’s Income-Based Repayment Plan (IBR) that was put into place during the Bush administration.

In 2010, Obama urged congress to change the plan, which caps borrowers’ payments at 15 percent of their income and forgives any remaining debt after 25 years of payments. Obama argued that high college tuition is a crushing burden for the middle class, and that by trimming payments to 10 percent of income and providing loan forgiveness after 20 years, lawmakers could provide important relief. Other student loan rule changes were also recommended, and Obama is pushing for speedier implementation of the changes.

The Department of Education is expected to finalize the changes by the end of 2012.

“We analyzed hundreds of scenarios for different borrower profiles,” the foundation said. “But contrary to benefitting low-income borrowers, the pending changes to IBR will actually provide generous benefits to borrowers with higher federal loan balances — those with graduate or professional degrees. A borrower with an MBA or a law degree can easily have a six-figure loan balance forgiven, even if his income exceeds $100,000 for much of his repayment term.”

The Associated Press reported two-thirds of U.S. college graduates in 2011 finished school with loan debt, owing an average of $26,600 — up about 5 percent from 2010.

The Institute for College Access estimated private student loans have been diminishing but still accounted for one-fifth of college graduate debt in 2011. The institute said average debt levels varied widely by state, ranging from a low of $17,250 in Utah to $32,450 in New Hampshire.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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The Obama administration’s student-loan program should be tightened to close loopholes that encourage excessive borrowing and do not distinguish between needy students and those with means, a new Washington-based think tank report concludes.
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2012-45-22
Monday, 22 Oct 2012 07:45 AM
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