Following a decision made by President Barack Obama on Tuesday, graduates will have a helping hand in paying off their student loan debt without ruining their credit or forcing them into poverty.
The Pay As You Earn proposal sets a cap on the monthly loan repayment rate of 10 percent of an individual’s discretionary income, and forgives all remaining debt after 20 years.
Discretionary income is defined as the money an individual has after taxes and after paying for basic living expenses such as food, housing and medical expenses.
This is an expansion on a measure already passed by congress, which originally set the cap at 15 percent through a period of 25 years and was scheduled to go into effect in 2014.
The new proposal is set to take effect next year with an estimated 1.6 million students being eligible to cap their loan payments and an additional 6 million eligible to consolidate loans and reduce interest rates.
Secretary of Education Arne Duncan said Obama exercised his executive authority to alter the legislation, and although it was met with controversy, it was necessary to enact this policy immediately.
Although higher education has become a near necessity in today’s economy, with so many students struggling to find work right after graduation, repaying debt is not always practical, Duncan said.
“We have to educate our way to a better economy,” he said.
Duncan said many of the low-wage public employees, such as nurses and teachers, suffered the most from having to repay the debts they accrued while pursuing their degrees.
Interdisciplinary studies in social science senior Mike Krcatovich plans on becoming a teacher, and he said the new regulations would be helpful for him.
“I wouldn’t say I’m intimidated (about entering the workforce),” Krcatovich said. “But (my debt) definitely does affect some decisions I will have to make early on in my career.”
For graduates to make use of the Pay As You Earn repayment plan, they must update their discretionary income every year, either through standard IRS tax form submissions or other credible documentation.
As a stipulation of the action, the federal government no longer will subsidize bank loans for students, but rather the government will provide the loans directly.
Although this method will not directly impact taxpayers, economics professor Charles Ballard said it likely will increase the national deficit in the short term.
But despite the initial impact, Ballard said this action ultimately will be beneficial.
Many recent graduates have had difficulty finding work, which sometimes causes them to run into problems repaying their debt on time and, occasionally, defaulting on their loans, Ballard said.
Along with keeping the amount of repayment proportional to each person’s income, graduates also will be able to consolidate their loans and their federal student loans to reduce their interest rates.
Associate Director of the Office of Financial Aid Val Meyers said consolidation and deferral programs existed in the past, but many students are not aware of them.
Meyers said MSU tries to bring all recent graduates in for exit counselling to set up strategies not only for finding employment, but also for managing debt.
“We basically take them through their options and possibilities,” she said.