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Updated Wednesday, 12:35 p.m.
President Obama on Wednesday announced a plan to allow college graduates to cap federal student loan repayments at 10 percent of discretionary income starting in January, two years before the cap was due to take effect under federal law.
The accelerated “pay as you earn” program, which Obama will authorize through executive order, could benefit up to 1.6 million borrowers and reduce their payments by as much as a couple hundred dollars a month, administration officials said. All remaining debt on the federal loans would be forgiven after 20 years — five years earlier than under current law.
In addition, some borrowers who have more than one federal student loan will be allowed to consolidate their debt, in some cases reducing their interest rates by up to half a percentage point, officials said. Obama formally announced the program at the University of Colorado’s downtown Denver campus.
“These are real savings that will help graduates get started in their careers,” Education Secretary Arne Duncan said in a conference call with reporters on Tuesday. “These changes could make a big difference in the lives of current college students and recent graduates as they enter one of toughest job markets in recent memory.”
Yet it remains unclear how many people will take advantage of the offer--even with the economy lagging and college tuition prices continuing to rise. Since 2007, borrowers have been allowed to cap federal student loan repayments at 15 percent of discretionary income. But White House officials acknowledged that just 450,000 of the nation’s 36 million student loan borrowers are participating in the income-based repayment program.
The student loan initiatives are intended to help energize the young Americans who were a key part of Obama’s base in the 2008 presidential race. They are the third effort by Obama this week to use executive action and other measures that do not require congressional approval to try to spur the economy, even as his $447 billion American Jobs Act remains stalled in Congress.
The White House has used the phrase “we can’t wait” to describe these efforts, which include a program to help underwater homeowners repay their mortgages and another aimed at forcing community health centers to hire up to 8,000 military veterans.
White House officials have said the executive initiatives are not intended to replace Obama’s jobs package and that the administration will continue to pressure Congress to approve provisions of the jobs bill that are offered as smaller legislative proposals.
Under current law, former students are allowed to cap repayments of federal loans at 15 percent of discretionary income. Last year, Congress approved legislation that would reduce the amount to 10 percent in 2014.
Obama is using his executive authority to create a separate provision that would offer the same program in 2012, said Melody Barnes, Obama’s domestic policy adviser.
Barnes said that the initiative is partially a response to a petition signed by more than 30,000 people on “We the People,” a recently added section of the White House’s Web site aimed at allowing citizens to lobby for action. It marks the first time the White House has taken action in response to a petition, she said.
“They rightly pointed out the weight of this debt in preventing college graduates from achieving their dreams,” Barnes said.
She emphasized that the program will not cost taxpayers anything because the administration plans to use savings from the elimination of loan subsidies to pay for the reduction on interest rates on loans that are consolidated.
Those interested in learning more about the new programs can call 1-800-4FEDAID or go to www.studentaid.ed.gov.