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Obama’s Student Loan Program Is a Windfall for the Rich Study Says

The Daily Ticker

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By Nicole Goodkind

Chances are you know someone who has student debt. Two-thirds of all college graduates leave school with student loans. The average balance is $26,600 per student. Last year outstanding student loan debt reached $1 trillion.

Both President Barack Obama and Republican presidential nominee Mitt Romney have addressed the rising cost of college on the campaign trail.

Unfortunately, according to Jason Delisle, director of the New America Foundation's Federal Education Budget Project, neither Obama's nor Romney's proposals to lower student debt will work.

Related: A College Degree Doesn't Guarantee a Good Job: Gary Shilling

When asked what he will do for students, Romney is quick to point to the John and Abigail Adams Scholarship, the program he established as Governor of Massachusetts. The program pays the 4-year tuition fees for the top 25% of high school performers if they are enrolled full-time in a Massachusetts public college or university.

Jason Delisle tells The Daily Ticker that this plan is not viable.

"I'm not entirely sure that it would be a model for the country," he says. "There's a certain culture around these student aid programs. They are to provide open access and not necessarily direct aid to certain types of students based on their performance."

Obama's proposal to lower student loan debt centers on the income-based repayment plan (IBR). The initial plan was passed under the George W. Bush administration in 2009. IBR allowed college graduates to spend just 15% of non-discretionary income on student loan repayments with complete loan forgiveness after 25 years.

President Obama amended the program in 2010 so that graduates spend only 10% of non-discretionary income on loan repayment and are granted forgiveness after 20 years. The new rules are scheduled to go into effect in 2014 but the White House wants to implement the updated program by the end of this year.

Related: Student Loan Bubble Putting Hundreds of Colleges at Risk

Jason Delisle and Alex Holt have published a paper examining the effects of Obama's new proposal and the results are not promising.

The study found that under the new IRB rules there is no extra cost in borrowing an additional dollar after a student loan debts exceed $60,000, regardless of salary.

"This is the more you borrow the more you can have forgiven," explains Delisle. "The provision doesn't really have any safeguard so that someone earning a substantial income wouldn't be disqualified from getting loan forgiveness."

For example, a law school student with $120,000 in debt and a starting salary of $65,000 might have $160,000 forgiven after 20 years.

"On the one hand you have the Obama administration talking about the spiraling cost of tuition and that they have a plan to keep tuition low and stop the growth or slow the growth, but this goes in a completely different direction," Delisle notes.

Related: Student Loans Could Be the Next Housing Bubble: Robert Reich

Delisle suggests reverting back to the Bush-era plan for borrowers with high incomes and implementing the new Obama plan for borrowers with low incomes.

"Those two things alone should essentially take care of the issues that we've highlighted," he says. "That will leave the core of the Obama administration's proposal in place and essentially close the loophole for these high-income earners."

So what is the solution to America's trillion-dollar student loan problem? Let us know in the comments below!

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