The Department of Education recently enacted new rules for Income-Based Repayment (IBR) of student loans. The hallmark of this “reform,” according to the WSWS, is that a small fraction of students will now be able to repay their loans in 20 years instead of 25 and their rates will go down from 15% of their discretionary income to 10%. The change will have no effect on undergraduates and may end up costing more for those who go on to earn graduate degrees if their starting salaries upon graduation are under $33,000 per year.
While tuition has been rising faster than the rate of inflation for the past decade the amount of student aid has been declining. Federal grants dropped 5% over the past year, the first decline in five years. Federal work study fell by 4% to $972 million—the first time it fell below $1 billion in over a decade. The Obama Administration has also implemented cuts to Pell Grants and interest rate subsidies.
Despite declining federal aid for students, need has actually been growing. A new report from the Project on Student Debt suggests that 66% of students must now borrow in order to afford a higher education. Student debt has risen by $303 billion since 2008, while the default rate has increased over 53% over the past several years. This has resulted in a recent series of new laws in some states to curtail recruiting scams at diploma mills (see here).
Obama’s student debt plan is clearly not designed to put any kind of dent in the problems of student indebtedness or defaults. Rather, its main goal is to protect the interests of the banks and investors that profit from student loans. The initial lenders are able to borrow from the Federal Reserve at just over 0%, while charging students anywhere from 3.4% to more than 10%. At the same time, hedge funds have been trading in student loans much like they do with mortgages and profiting handsomely from it.