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Obama's 'solution' to student loan debt crisis skirts Congress, adds to deficit

Aaron Task
·Editor in Chief

Around 40 million Americans are saddled with more than $1.2 trillion in student loans, which last year surpassed credit cards as the largest form of consumer debt. The student loan debt burden is having a major impact on the macro economy by delaying first-time home purchases and marriages, as well as limiting the mobility of many recent grads, which hurts their long-term earnings potential and sense of optimism about the future.

In an effort to address the crisis in student loans, President Obama embraced a "pay-as-you-earn" scheme wherein payments on federal student loans are capped at 10% of income and loans are forgiven after 20 years. The plan was first launched in 2012 and then expanded this year to include borrowers who took out loans before October 2007 or stopped borrowing by October 2011, making an estimated 5 million Americans eligible for the program.

It sounds great on paper and certainly welcomed by those able to take advantage of the program. But there's no free lunch.

The President's 2016 budget proposal reveals the "pay-as-you-earn" program will add $21.8 billion to the federal deficit, a nearly 5% increase. At $21.8 billion, the annual cost of the program exceeds the combined budgets of NASA, the Interior Department and the EPA, Politico reports. "And because of a quirk in the budget process for credit programs, the department can add the $21.8 billion to the deficit automatically, without seeking appropriations or even approval from Congress," the report says.

In other words, there's nothing Republican deficit hawks can do about this increase in the deficit, further evidence that President Obama's 'go it alone' approach has teeth.

Again, there's no free lunch -- Barclays Capital estimates the "pay-as-you-earn" plan will add $250 billion to the deficit over the next decade. But there is a better way, as Jennifer Rogers and I discuss in the accompanying video.

In yet another quirk of the student loan crisis, federal student loan borrowers are currently able to consolidate their loans, but not refinance them like a mortgage (or a credit card if you're savvy), as Yahoo Finance's Mandi Woodruff reports.

Related: Student loan refinancing is a great idea — except when it's not

So here's a 'great' idea that's clearly too simple and logical for Washington to embrace: The U.S. government, which can currently borrow for 10 years for less than 2% and 30 years for less than 2.5% -- should issue new debt and use to the proceeds to offer refinancing. A similar proposal by Sen. Elizabeth Warren (D-MA) failed to pass the Senate last spring, but that doesn't mean it's not an idea whose time has come. (Sen. Warren's office did not return calls from Yahoo Finance seeking comment.)

Yes, issuing new debt will add to the deficit -- which has come down sharply from 2009's record $1.4 trillion -- but it'll be at very low rates relative to recent history and, more importantly, will be done in the light of day and require the approval of Congress, which is supposed to control the country's purse strings.

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Unfortunately, it's too much to hope that our elected officials would see that this approach makes both economic and political sense. But a guy can dream, can't he?

Aaron Task is Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.