President Barack Obama’s latest executive mandate on student loan relief theoretically could be a big sigh of relief for young people struggling to make loan payments. It opens up the current income-based repayment program – which caps loan repayments at 10 percent of a federal direct loan borrower’s monthly income – to those who borrowed before October 2007.
Although the move is likely to draw criticism from Republicans because of its potential taxpayer burden, it could provide a big economic boost by freeing up the spending power of about 5 million more young consumers.
“If you lower the amount students are required to pay each month … it’ll boost economic activity because these borrowers have trouble saving for larger purchases,” says Elizabeth Baylor, associate director of postsecondary education at the left-leaning Center for American Progress in Washington. “We find that money will get injected very quickly back into the economy and will have a stimulating effect. The lack of flexibility in peoples’ budgets has definitely impacted their ability to pay for bigger purchases.”
In part deterred by loan repayment, Americans have been forming households at about half the rate they did before the recession, from 1997 to 2007, according to U.S. Census Bureau data. Baylor estimates that every time a household is created, it “sets up $140,000 of economic activity.”
Of all outstanding loans, only 60 percent of borrowers in repayment were making their payments on time, and the remaining 40 percent were in deferment, forbearance or default, “indicating that the borrowers are in distress,” according to a November report from the Center for American Progress that Burke co-authored.
It’s clear that even though a college education doesn’t guarantee a high-paying job right away, outcomes are still better for Americans with a four-year degree compared to their peers with only a high school degree. Among full-time workers ages 25 to 32, college graduates made $17,500 more per year than those with just a high school diploma, a February Pew Research Center study showed.
Furthermore, college graduates are far less likely to be unemployed. The jobless rate for those 25 and older with a college degree was 3.2 percent, less than half of the 6.5 percent for someone with just a high school education, recent Labor Department figures show.
Student debt obligations are a drag on individuals in terms of wealth accumulation, which impacts their ability to spend. Households headed by young college-educated adults without student debt have about seven times the net worth of households headed by young college graduates with student debt, a May Pew study showed.
Obama on Monday also endorsed a student loan refinancing bill sponsored by Sen. Elizabeth Warren, D.-Mass., which would be financed by higher taxes on millionaires and faces Republican opposition.
Critics of Obama's loan relief approach say it comes at too high of a cost to the government, and ultimately, taxpayers.
“When you do things like income-based repayment or loan forgiveness, you’re doing it on the backs of three-quarters of American taxpayers who don’t hold bachelor’s degrees themselves,” says Lindsey Burke, an education fellow at The Heritage Foundation, a conservative think tank.
“You’re asking folks who presumably earn less than their bachelor degree-holding counterparts to finance the college of those folks, so I think it’s an incredibly inequitable way of thinking about financing higher education,” she says.
Expansion of relief programs won’t put pressure on institutions of higher education to lower their costs, Burke says. Rising costs have resulted in more than $1 trillion in total outstanding student loan debt, and that figure has more than tripled since 2004. More than 7 in 10 college seniors in 2012 graduated with some amount of student loan debt, which was $29,400 on average.
Something the federal government can do to offset rising tuition prices, Baylor says, is provide matching grants for states to help defray the cost for students.
“One of the things that I think is really important given the increasing amount that students are required to pay is the disinvestment at the state level as states struggle to balance their budgets,” Baylor says.