President Obama’s new "Pay As You Earn" plan will lessen the burden of student-loan debt for more than 1.5 million borrowers nationwide.
But one expert said that doesn’t necessarily mean the federal government will lose money, even though Obama plans to give students an opportunity to drop loan payments down to 10 percent of their discretionary income starting January 2012.
"Even though you are making payments more affordable, you are also helping people stay out of default," said Lauren Asher, the president for the Institute for College Access and Success. "Taxpayers save money when loans are moved from private lenders to the federal government."
Officials said by eliminating bank subsidies, the government’s revamped student-loan program makes the direct loan program cheaper than using private lenders.
Under the new plan, all lingering debt will be forgiven after 20 years.
"In a global economy, putting a college education within reach for every American has never been more important," Obama said in a press release Tuesday. "But it’s also never been more expensive. That’s why, today, we’re taking steps to help nearly 1.6 million Americans lower their monthly student-loan payments."
Asher said the Pay As You Earn plan costs taxpayers less to have loans in the direct loans program, and that consolidation helps offset the costs, making federal loans less costly for taxpayers.
Currently, the improved income-based repayment plan allows borrowers to keep monthly payments at 15 percent of their discretionary income and become debt-free after 25 years of payment.
This law would convert to the 10 percent cap and 20 years debt forgiveness by 2014.
Even though students at the UI have a low loan default rate — 1.9 percent compared to the 8.8 percent national average — one UI official said any help the federal government can offer will be beneficial.
"I think anything that can happen that can ease the stress of students is a good thing," said Mark Warner, the director of UI Student Financial Aid. "[The change] really affects the groups of students who are struggling right now to pay back their loans."
The pressing issue has prompted the Obama administration to push for an earlier date for relief, said Education Secretary Arne Duncan.
"We have the executive authority to do this," Duncan said during a phone conference Wednesday afternoon. "We see a real sense of urgency. Folks are hurting right now."
Roughly 6 million borrowers with old Federal Family Education Loans and Direct Loans will be offered a consolidation option to enroll the old program into the Direct Loans program. This opportunity comes with a 0.5 percent interest rate reduction.
And changes made will not raise costs for taxpayers, officials said.
"We are doing all of this without going to the taxpayers for a nickel," Duncan said.
