NEW YORK (MainStreet) — The student loan crisis got its 15 seconds of fame during the State of the Union address last night when President Obama pledged to "guaranty every child access to a world class education."
That paved the way for his claim that his administration has "worked with lenders to reform student loans."
He didn't say how. He also said his administration had worked to "cap student loan payments to 10% of income."
While he gave no additional details, he seemed to be referring to The Income-Based Repayment (IBR) plan, which was enacted as part of the College Cost Reduction and Access Act of 2007 — passed before he was elected - and was made available on July 1, 2009, after he took office. Income-Based Repayment is available only to federal loans and not at all to private loans.
According to the Website www.finaid.org, "The monthly loan payments are capped at 15% of discretionary income with forgiveness of any remaining debt including accrued but unpaid interest after 25 years." Discretionary income is gross income minus the poverty line that corresponds to your family situation and state of residence.
The improved IBR rate of 10% will be available on new loans made on or after July 1, 2014, cutting monthly loan payments by one-third.
A drawback to IBRs is that since a borrower has a lower monthly payment to make, it will take longer to pay back these loans, since the monthly payments are reduced, increasing the amount of interest that has to be paid.
In a response to the address, Rep. John Kline (R-Minn.), chair of the House Workforce and Education Committee, noted that "college costs are skyrocketing," which he attributed to "the same flawed agenda and failed status quo" of the Obama administration.
The extent of the student loan crisis was underscored — perhaps unwittingly — by a guest First Lady Michelle Obama picked to join her in the House gallery for the speech.
Sabrina Simone Jenkins of Charleston, S.C., is a single mother who, even though she worked full-time while attending college, ran up $90,000 in student loans. Those loans are now a financial ticking time bomb.
"After servicing in the Air Force," said a White House press release, Jenkins took classes at DeVry University, a for-profit college, hoping for a career in human resources. She graduated with a 3.7 GPA at the age of 42 – "all while caring for ailing family members and becoming seriously ill herself." She then earned a masters degree in human resources.
Jenkins's student loan debt is "something that will only worsen," according to the White House. Her story begs the question: is she a role model who pulled herself up by her own bootstraps, or the victim of a for-profit college and ill-advised student loans?
Either way, Jenkins embodies the worst-case scenario of the crisis — that it will become generational, and that the children of broke borrowers are likely to follow in their parents footsteps. The White House acknowledged that Jenkins's teenaged daughter is set to go into debt herself to attend college while her mother struggles with her own potentially insurmountable student loans.
Among the back stories are attempts by federal agencies to get their arms around the problem of loan defaults and the lack of options for refinancing — especially for private loans.
In a January 9 blog post, the Consumer Financial Protection Bureau's student loan ombudsman, Rohit Chopra, wrote, "Unfortunately, too many student loan borrowers are struggling. According to a report we published jointly with the Department of Education, there were more than 850,000 private student loans in default, with even more in delinquency."
"Borrowers need more options to avoid default," Chopra wrote, "which is in the best interest of borrowers, financial institutions and the economy more broadly."
These issues did not make the cut for the State of the Union address.
--Written by John Sandman for MainStreet