If Congress responds to President Barack Obama's push to reform student loans, the new rules could dramatically reduce monthly payments for millions of college graduates in California.
For instance, single graduates earning $25,000 a year but owing $30,000, who would owe $345 a month under a regular payment plan, would see their monthly payment capped at $73. And if they worked in government or for a nonprofit organization, whatever portion of the loan that remained unpaid after 10 years would be forgiven.
"In the United States of America, no one should go broke because they chose to go to college,'' Obama said during last week's State of the Union address, drawing a standing ovation from both Republicans and Democrats.
The proposal, part of a broader effort aimed at easing the economic burdens of the middle class, comes at a crucial time for students who face soaring tuition costs and plummeting job prospects upon graduation. The University of California recently raised its fees by 33 percent.
Obama's plan calls for limiting payments on student loans to no more than 10 percent of that portion of their salary that exceeds $16,245, which is 150 percent of the poverty rate. Anyone making less than that amount would owe nothing. A former student who is single and earning $35,000 a year, for example, would owe no more than 10 percent of $18,755 ($35,000 minus $16,245), which comes to $156 a month.
Graduates with families would see their payments reduced even more dramatically, because the poverty line is much higher for families. A graduate with a family of four would not need to pay anything on their student loans until their salary climbed above $33,075, and even then would need to pay only 10 percent of the amount that exceeded that amount.
In addition, the plan forgives loans ---- no matter what the remaining balance ---- after 10 years for those working in government or nonprofit jobs. Those working in the private sector would have their loans forgiven after 20 years.
A federal program that took effect last summer allows graduates to limit their payments to 15 percent of their income and forgives loans after 25 years.
Eligibility and loan calculators can be found at IBRinfo.org. Obama's proposed caps are far more beneficial and probably would be taken advantage of by many more borrowers.
"It's a good proposal that will help as much as a quarter of borrowers by reducing their monthly payments by a third as compared with the current income-based repayment,'' said Mark Kantrowitz, a student loan expert and publisher of FinAid.org, a guide to financial aid.
The proposed student loan reform is among the recommendations of Obama's Middle Class Task Force, chaired by Vice President Joe Biden, which issued its report Jan. 25. The plan is likely to be greeted warmly by lawmakers looking to bolster their standing with middle-class voters in an election year.
"These proposals are welcome news for the millions of families whose retirement and college savings were devastated by the financial crisis,'' said U.S. Rep. George Miller, D-Martinez, who chairs the House education committee.
About one-half of all students take out loans and graduate with an average of $23,000 of debt, according to FinAid.org.
UC students graduate with significantly lower debts, averaging $15,000 a student, according to the UC Office of the President.
The proposal also is aimed at steering students into public sector jobs, which in many cases are limited to those who can afford to accept the lower salaries.
Graduates are eligible for public service forgiveness if they work for a tax-exempt or nonprofit organization, public schools, government at any level, as well as any agency that provides a public service such as libraries, public health or safety. Teaching at a public university would qualify.
If Congress passes the law this year, it could take effect on July 1, 2011, according to a senior administration official.
The California News Service is a journalism project of the University of California's Washington Center and UC Berkeley's Graduate School of Journalism.
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