The Impact of Obama’s Student Loan Legislation

I previously blogged about how Obama’s student loan legislation proposals will have short-term benefits with long-term costs. Daniel Indiviglio examines the three major pieces of the proposed legislation – consolidation, payment limits, and loan forgiveness – and how they will affect the average borrower. The answer: not much. I may have been far too generous in saying it will have a short-term benefit. Perhaps it only offers long-term costs.

Consolidation

The first would clearly be the most significant, because it is aimed at helping more student loan borrowers. How much would an interest rate reduction of up to 0.5% affect payments?

For the average borrower, the impact would be small. In 2011, Bachelor’s degree recipients graduating with debt had an average balance of $27,204, according to an analysis done by finaid.org, based on Department of Education data. That average has ballooned from just $17,646 over the past decade.

Using these values as the high and low bounds of average student debt over the last ten years, the monthly savings for the average student loan borrower would be between $4.50 and $7.75 per month. Clearly, this isn’t going to save the economy. While borrowers with bigger balances would save more, this is the average. And even someone with $100,000 in loans would only cut their monthly payments by $28.50.

The provisions on payment limits and loan forgiveness will have an even smaller impact. Indiviglio concludes:

By calling for these measures, President Obama seeks to respond directly to young Americans stressed about their student loans. Indeed, one of the vague objectives of the Occupy Wall Street movement is for student debt forgiveness. But from a practical standpoint, these executive orders won’t have much of an impact on the economy. To take on the student debt problem more aggressively, the president would need some actual legislation that would shake the fundamental framework of the student loan system.

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Filed under Domestic Politics, Education

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