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Questions Remain Regarding Obama’s Student Loan Proposal

by Madeline Stocker | Jun 11, 2014 6:59am
(0) | Commenting has expired
Posted to: Economics, Education, White House

In an attempt to expand the financial accessibility of higher education, President Barack Obama signed an executive order Monday allowing five million students to cap their federal student loan payments at 10 percent of their monthly incomes.

An Obama administration official said Tuesday in a conference call with reporters that she doesn’t know how much the proposal will ultimately cost because it’s unknown how many students will participate in the program.

Cecilia Muñoz, Director of the Domestic Policy Council for the Obama administration, told reporters that the number of students who will take advantage of the program “is difficult to know in advance,” leaving some concerned about the proposals potential impact on taxpayers.

“We can’t estimate the cost because we can’t estimate how many borrowers will take up the option,” Muñoz said.

According to Muñoz, the value of a college education is “vital to our economic future.” Asked to specify how the administration planned to fund the project, Muñoz said that Congress has “mechanisms” to pay for the cost.

Obama’s executive order, which he announced Monday, is an extension of previous legislation regarding outstanding loans, which allowed 1 million student-borrowers to limit their student loan payments to only 10 percent of their monthly income. In addition to the extension, the order grants students with loans predating October 2007 to take advantage of refinancing, whereas the former regulations only applied to current and future students.

As it stands, the average student owes approximately $30,000 in outstanding loans by the time they graduate. Collectively, American students owe more than 1 trillion in loans —  a figure that currently outstrips the country’s combined credit card debt. In Connecticut, 508,000 student-borrowers have $11.7 million in outstanding debt, according to the White House report.

Over the last 30 years, the average tuition at a public university has more than tripled. At the same time, the typical family’s income has gone up just 16 percent.

According to Obama, these rising costs have left middle-class families feeling “trapped.”

“Let’s be honest,” Obama said Monday. “Families at the top, they can easily save more than enough money to pay for school out of pocket. Families at the bottom face a lot of obstacles, but they can turn to federal programs designed to help them handle costs. But you’ve got a lot of middle-class families who can’t build up enough savings, don’t qualify for support, feel like nobody is looking out for them.”

The executive order comes on the heels of a string of initiatives led by the Obama administration, all of which aim to achieve the president’s goal of being a world leader in the number of college graduates. Since 2009, the administration has extended the Pell Grant to 2.7 million applicants, created an annual tax credit of $2,500 for middle class families with children attending college, and has begun to develop a rating system that will determine the financial accessibility of colleges and universities across the country.

“Helping students manage their debt is one piece of the broader college affordability issue that we are deeply engaged in,” Muñoz said Tuesday. “This administration has taken and will continue to take whatever steps we need to to bring down the overall cost of college and further reduce the burden of debt.”

Though Muñoz and other like-minded officials repeatedly voiced the importance of increased affordability, some remain skeptical of the Education Department’s decision to name a former Sallie Mae division —  which has come under the scrutiny of the Justice Department —  as a finalist for a potential billion dollar contract to manage the government’s student loans.

Navient handled Sallie Mae’s student loans when the two were partners. The Justice Department has accused Navient of cheating U.S. soldiers by overcharging them and obtaining default judgments. Sallie Mae-Navient is one of four finalists for the contract, which would put them in charge of federal student loan origination and debt collection. Accenture, Neinet Servicing, and Team Great Lakes are the three other finalists.

In response to these allegations, Muñoz said that the Education Department was ready to address any outstanding concerns. 

“The Department of Education takes the Department of Justice’s claim very seriously,” Muñoz said. “They’re doing a top-to-bottom review of Sallie Mae, and that review should influence future decisions with respect to funding.”

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