The initiative was also an effort to reach out to a voting bloc that was crucial to Obama’s winning 2008 coalition, a bloc that he will need next year as well.
Obama told thousands of cheering students at the University of Colorado’s Denver campus that his administration will no longer wait for Congress to respond to the rising financial burden of higher education. The president also told the students that he and first lady Michelle Obama empathize with their plight.
“We were paying more on our student loans than we were paying on our mortgage each month,” he said. “How do we make college more affordable, and how do we reduce your burden?”
The president’s “Know Before You Owe” plan would allow some college graduates to limit federal student loan repayments to 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” option could benefit up to 1.6 million low-income borrowers and reduce their payments by as much as a couple of 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. To qualify, borrowers must have student loans in 2012 and have had loans in at least one of the previous four years.
In addition, nearly 6 million 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, White House officials said.
Obama said the plan — which administration aides emphasized will be paid for by the elimination of federal subsidies to private banks after the loans are consolidated — has the potential to boost the economy.
“Student loan debt has now surpassed credit card debt for the first time ever,” Obama said. “And when a big chunk of every paycheck goes towards student loans instead of being spent on other things, that’s not just tough for middle-class families, it’s painful for the economy and it’s harmful to our recovery because that money is not going to help businesses grow.”
Education advocates hailed the announcement as a modest first step toward addressing the increasing costs of higher education, but they warned that more must be done as interest rates on federal student loans are set to double in July.
“The administration is clearly acting in the interest of students, and this is a good thing in the current environment,” said Terry Hartle, senior vice president of the American Council on Education. “But the fact remains that the biggest student loan issue facing us is the doubling of interest rates in eight months.”