The new budget proposed by Obama for next year will try to minimize the burden faced by graduates due to a weak job market, by reducing the rate of interest on federal student loans. The proposal will tie the student loan interest rates to the cost of funding this program by the government. Currently the Congress has set a fixed rate which the students pay, whereas the costs of borrowing are at a record low, which allow the Government to make a profit on student borrowing. The goal of this proposal is to give student some much needed debt relief on their federal student loans. The Forgiveness Act, also known as the Obama Forgiveness Act has already helped greatly reduce the burden on those with federal student loans. Teachers are eligible for the Teacher Forgiveness Program which allows up to $17,000 in principle reduction for qualifying teachers. All others who are enrolled into the Forgiveness Act are eligible for forgiveness on their loans at the end of the term, any remaining balance would be forgiven.
The Obama Forgiveness Act has come at a time when alarm has been expressed by a large number of policymakers regarding the fast rising student debt and the high rates of interest paid by the graduates. Also, concern has been expressed that this rise in student debt will pose a risk to the spending of an average household over the next 3 years.
Though the budget proposal is supposed to bring a short term interest rate relief to the students who will be taking loans this year, but experts believe that it will only be a short term solution as there are no cuts in the interest rates which the students will face later. If in the coming years, the economy improves and the borrowing costs of the government increase, the interest rates of the students’ loan may also rise above the current level.
Hence, the students may have to pay a low interest rate presently, but it may ultimately cost them more in the future.
According to Obama’s budget plan, to consolidate student loan the rates of interest will be tied to the Treasury notes’ market value, which will mean that the ten-year Treasury notes would decide the loan interest. Thus, every year, the interest rate will reset and be fixed for the loan’s remaining life. The plan will increase Stafford Loans’ annual rate, which is the main undergraduate funding source, by 0.93% point above the ten-year Treasury yield for the students coming from households with low income, and 2.93% points above the rate for the others. Parents and students who receive federal student loans will have to pay 3.93% points above the 10-year treasury yield notes. If the budget proposal is implemented now, the interest rates on Stafford loan programs would decrease considerably and PLUS loans would be available for the parents and graduate students. Thus, at the current rates, undergraduates with the lowest incomes would have to pay 2.74% and others 4.74% for their loans, whereas parents and graduate students would have to pay 5.74%.
Currently, Congress sets up the federal student loan interest rates and it has no relation to the interest rate paid by the government to borrow. In recent times, the difference between the fixed interest rates paid by the students and the borrowing rates of the government has grown to high levels. Thus, similar reforms for the student loan have been suggested in recent years by the student advocacy groups, as those taking student loans have to face higher interest rates, though businesses, car and home buyers could take advantage of the low borrowing rates. This has helped to burden those with federal student loans for trying to further their education. It has been suggested by many that if there was a considerable increase in the government’s borrowing costs, than a cap could be put on the interest rates, but this feature has not been included in Obama’s new budget plan. The government is saying that it wants to expand a program which will allow the borrowers to tie the monthly payments of student loan to their income, instead of putting a cap to the rate of interests. It is being said that this initiative of pay as you earn, is for ensuring that there is less defaulted student loans and no borrower is compelled to pay an unmanageable amount of money, regardless of their federal student loan balance.
Some groups have also suggested student loan forgiveness and teacher loan forgiveness and to tie up the government borrowing costs to the student loan interest rates for student debt relief. It would include an interest-rate assurance form which would help the students to refinance at lower interest rates if it was too high while first taking out the loan.
Obama’s plan will be facing an uphill task in the House of Representatives as the budget rates state that a way has to be found by the members, for compensating the taxpayers on their lost income which would accompany the plan of lowering the students federal loan borrowing costs. Last year, for student loan help, a one year extension of 3.4% interest rate had been approved by the lawmakers for students with low income. If the lawmakers don’t act fast, than after 3 months, the rate of loan interest will grow to 6.8% and add an extra cost of $1000 to the students for their loan’s life. Thus, a broader solution is needed which would move away from fixed rates of interest.