President Barack Obama issued an executive order Monday directing the secretary of education to ensure that students with federal loans will be able to cap payments at 10% of their monthly income. The order expands on previous legislation aimed at making it easier for young Americans to repay student loan debts.
"I'm only here because this country gave me a chance through education," said Obama, who also pushed for Senate legislation that supports the issue. "We are here today because we believe that in America, no hard-working young person should be priced out of a higher education."
Federal student debt now tops $1 trillion in America, and an increasing number of young people have been defaulting on these loans. Nearly 15% default within the first three years of repayment. Student debt is now the biggest area of consumer debt in the United States.
The White House says the new executive order will affect as many as five million borrowers, but it will not be available until December 2015.
Yahoo Finance Editor-in-Chief Aaron Task has reservations about the order. “In 20 years the debt goes away if you haven’t repaid it all and guess who it goes back to? The taxpayer. And I just don’t think that that’s going to end very well for the taxpayer. It does give an incentive for someone to make less money because their debt payment is going to be less and they know over the course of time that debt’s going to go away,” he says.
Yahoo Finance’s Lauren Lyster points out that this might encourage students to take out more debt than they normally would. Task adds, “That might be the origin of the student debt crisis in the first place - the availability of credit.”
The easy credit, concludes Task, is what allows colleges to keep raising prices.
One possible solution? Tie student loan rates to treasury rates. “If we’re really, as a country, saying education is the most important thing and we want to invest in our young people… let’s really support them economically," says Task. "If the U.S. government can borrow (at) 2.50% for 10-year right now, make it tied to that level,” says Task.
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