Coming to the aid of the higher education industry that had begun to show some concerns that students may no longer be able to afford skyrocketing tuition rates, President Obama today announced a plan that will ensure students are able to commit to higher levels of federally backed student loans. By limiting student obligations to repay, and by passing more of the repayment burden onto taxpayers, colleges and universities will be able to continue to raise tuitions at a rate that outpaces nearly every other cost center in the American economy. The move will come as a great relief to the education establishment who otherwise may have needed to cut or cap tuitions.
The Obama plan limits repayment obligations to just 10% of "discretionary income" which it defines as total income above 150% of the federal poverty level (currently translating to about $16,000 for an individual, or $33,500 for a family of four). The plan also limits the term of obligation to 20 years. These terms represent a substantial easing and acceleration of the terms in Obama's "Pay as You Earn Plan," which was just announced last year (see April 2010 critique).
That plan, which was scheduled to begin in 2014, represented the first time the government had imposed any limits on repayment obligations. It had capped repayments at 15% of discretionary income for 25 years.
Assuming that a successful college graduate would earn, on average, $80,000 per year over the course of the 20-year obligation period, the repayment burden under the new plan will total somewhere around $4,500 per year, or $90,000 for the life of the loan. A less successful graduate who earns say $50,000 per year, on average over the 20-year obligation period, would have a repayment burden of just $1,500 per year, or just $30,000 over the life of the loan. Any loan amounts above those totals will be forgiven.