The plan is composed of three main provisions. First, it will hasten the implementation of a plan passed by Congress in 2010, which lowered the minimum monthly payments for borrowers of federal student loans from 15 percent of their monthly income to 10 percent. The plan, originally intended to take effect in 2014, will now begin starting in the 2012-2013 school year. A White House Press release stated that the change will help approximately 1.6 million people.
Second, it allows for the consolidation of various federal student loans into one loan. It gives people who consolidate their loans a .25 percent interest rate reduction on the new combined loan and an additional .25 percent drop in interest on Federal Family Education Loans (a type of federal loan that is in the process of being phased out) that they incorporate into this bundled loan.
“I remember writing like five different checks to five different loan agencies — and if you lost one that month, you couldn’t get all the bills together, you missed a payment, and then suddenly you were paying a penalty,” Obama said in his speech. “We’re going to make it easier for you to have one payment a month at a better interest rate. And this won’t cost — it won’t cost taxpayers a dime, but it will save you money and it will save you time.”
Finally, Obama announced plans for the creation of a “Financial Aid Shopping Sheet,” a standardized financial aid disclosure form that all colleges would have to provide to prospective students in order make comparisons of financial aid packages simpler.
In another recent change not mentioned in Obama’s speech, if students faithfully make their monthly payments for 20 years, the federal government will forgive any remaining debt. Previously, the time limit had been 25 years. For some students who enter public service or non-profit business careers, that limit drops to 10 years. This particular provision has been in place for the last three years.
Stanford Effects
So how will these provisions affect the Stanford community? Karen Cooper, associate dean and director of financial aid believes that they will have minimal effect. While she acknowledged that the option for smaller monthly income-based payments will help some students, she said that Stanford students are already very successful when it comes to paying off student loans. Three years after graduation, only .8 percent of Stanford students default on student loans. This number is far lower than the national average, which was 8.8 percent for the 2009 fiscal year, according to a Department of Education press release. Cooper attributed this low number to the motivation of Stanford students.
“The kind of student who comes here to Stanford is generally pretty driven and career-minded and they’re able to repay their loans,” she said. “It’s just really not an issue for our students.”
Additionally, only 28 percent of undergraduates and 25 percent of Stanford graduate students (excluding students in the law, medical, and business schools) will graduate with any indebtedness at all in 2011. The average indebtedness for that 28 percent of undergraduates is a mere $16,458.
The other two provisions may actually do more harm than good in the Stanford community. Cooper believes that while some standardization would be useful, if Stanford is forced by the Department of Education to use a standardized fact-sheet, it may actually confuse prospective students rather than inform them.
“I think a level of standardization is necessary but I also think too that an award letter from Stanford might be very different than an award letter from a proprietary institution or even from a public institution that’s only giving federal aid,” she said.
“We spend significantly more institutional funds in our financial aid packages than we do federal aid so it feels a little lopsided to have these far-reaching regulations that would prescribe how our award letter looked when it may not apply to our students so much because we’re awarding this institutional aid,” Cooper continued.
“The kinds of things that they are talking about adding is also requiring a university’s graduation rate or a university’s average indebtedness or a university’s average default rate, that king of thing,” she continued. “When most of my award letters don’t even have loans in the financial aid package, putting that information out there might confuse some of these students rather than make the information more clear.”
She has sent in a copy of Stanford’s current financial aid award letter to the Department of Education and is engaging in national discussions about the ideal contents of such a standardized letter. She anticipates it will be at least another six to nine months before the Department of Education comes to a conclusion about the standardized letter’s contents.
And as far as the loan consolidation proposal, Cooper claims that consolidating loans often makes student loans more expensive in the long run, even when one takes into consideration the savings Obama’s plan offers.
“Most of our students actually don’t use consolidation. They keep their loans separate if they’ve borrowed from multiple sources and make payments to each one,” Cooper said. “Actually you pay off the loans faster that way and it saves you money in interest…the advantages to consolidation [are] that now all your loans are in one place and you only make one payment, but generally you’re making a lower monthly payment and it stretches that amount of time you’re paying out so you pay more interest over the life of the loan.”
She also added that helpful forgiveness provisions which some loans have will be lost upon consolidation.
Cooper said Obama’s plan was a good decision for students nationwide. “It’s a good thing to do nationally is my opinion. I think it was important and needs to be done.”
“Will it be a boon for Stanford students?” she asked. “They were already doing pretty good so not necessarily but I still feel it’s a good thing to have in place.” She continued, “Students are already doing well based on the standard repayment options so we haven’t felt a huge need for these kinds of programs with our students, but Stanford students will certainly benefit, and maybe it will make some more students feel more comfortable with making choices like going into public service, [which] is going to be a lower income career.”
Graduate Effects
These reforms aren’t the only ones affecting higher education, however. Marti Trujillo, director of M.D. financial aid, said that the recent termination of the subsidized Stafford loan program will have a significant effect on graduate students. Under this program, medical students could borrow up to $8,500 for each year of medical school. For this $8,500, the federal government would pay off all interest accrued while the students were enrolled in medical school. Now that this program has ended, students will have to pay for the interest accrued while in school for all federal loans they take out.
Trujillo said this change will make students consider more carefully just how much money they need to borrow, but she does not think it will turn students away from medical school. To mitigate the effects of this reform, Stanford has, using funding from its endowment, raised the maximum quarterly medical school grant from $10,000 to $11,000 for its students most in need of financial aid. However, this reform will hit some less needy students harder. She said there is currently a capital campaign going on to support financial aid.
“When we’ll see the results of that I don’t know. I don’t think it’s going to be immediate but I think [in] the future I do see the school doing more to offset the educational debt burden on students,” she explained about the capital program.
“We do have one of the lowest graduating debts amongst all schools in the United States … so that’s a combination of our endowment, our need-based grant, opportunities for students to work as TAs and offset some of their loans … of course we want to maintain that position and even offset it or reduce it even further if possible,” she continued. “We want to make sure that anyone who wants to come to Stanford can afford to do it.”