Is Obama's Student Loan Consolidation Bill a Step in the Right Direction?

As Republicans and Democrats, Liberals and Conservatives wrestle with issues of how to jump start the economy, Student loan consolidation as put forth by President Obama this week will almost certainly gain center stage for the millions of American students literally buried under mountains of student loan debt.

Federal Student Loan Consolidation Programs

In a move that would circumvent congress, President Obama hopes to be able to ease the student loan burden on American students by capping student loan payments to ten percent of the student's income. This news might come as a significant relief to students who pursued advanced degrees, only to graduate into an economy that had no room for them. A startling number of students, particularly those holding masters degrees and higher, have flooded the currently shrunken job market, with many taking low-paying jobs outside their degree field not just to make ends meet, but also to begin paying back student loans that can easily eclipse $100,000, depending on the program from which they graduated.

Federal Student Loan Forgiveness?

This plan to cap student loan payments was originally slated to begin in 2014, but has been pushed up to begin during 2012, a move that many conservatives are calling "shenanigans" during a pivotal presidential election year. Even so, the plan could be a boon to graduating students regardless of their political affiliation. However, the student loan consolidation plan does not include student loan forgiveness, a scholarship-style post-graduation perk that is offered in some professions such as teaching. Generally speaking, student loan forgiveness is granted to graduating students who accept work in less desirable fields within their degree field. For teachers, this involves working in depressed areas that don't have the necessary tax base to support high-quality education for their students.

The student loan consolidation plan would allow for certain federal student loans to be lumped together into a single loan payment, allowing graduates to make a single monthly payment as opposed to multiple payments, a situation that can easily lead to missed payments. In addition, a .5% reduction in the interest rate on some of their loans, a move that could save students hundreds of dollars on their loans at the end of the loan terms.

That the plan does not include a federally-funded student loan forgiveness program will almost certainly be a disappointment to the millions of students working off their student loans every day, but streamlining the student loan process is intended to help offset the many loan defaults that occur every year, and threaten to continue unabated unless something is done to help. The plan also intends to increase the Pell grant award over the next several years to $6,900 while at the same time reducing subsidies paid to banks who offer student loans in the program and saving tax payers an estimated 87 billion dollars.

Sources:
Reuters: "Obama Tells Students of Plans to Ease Loan Burden"; Ian Simpson
USA today: "House Backs Bill To Overhaul Student Loan Program"; www.usatoday.com