In what has been dubbed the largest overhaul of tuition funding since the GI Bill, the president has enacted legislation that will allow former students to forgo making payments toward their federal student loans if their total income is less than 150% of the poverty level for their family. Borrowers who make more than 150% of the poverty line would only be obliged to pay 10% of their income toward federal student loan payments. Further, all federal student loan debt would be forgiven after 20 years of payment.
It has been projected that instituting these early forgiveness and more lenient financial hardship programs will cost the federal government 1 billion dollars in the first five years of the program.
Unintended Consequences
While these changes might be a boon for college graduates struggling under the burden of debt and poor job prospects, the potential effect on college tuition rates might be less than spectacular. Currently, the tuition at state schools is inflated compared to the average minimum wage. In the past, the cost of tuition was capped by the limits placed on student borrowing. Increased government funding and the ever-increasing burden of student loans allowed universities to increase their tuition with very little resistance from students. Students don’t experience the negative effects of over borrowing and tax-subsidized government funding until they graduate and enter the job market.
Creating an environment that encourages students to borrow more money from the government does nothing to curtail the problem of tuition inflation. Instead, it guarantees that tuition rates will continue to increase dramatically over the next twenty years. If the amount of available federal student loans is not increased and students aren’t incentivized to borrow, universities will be forced to adjust their tuition rates to more closely match the minimum wage. Students would then have the option of working their way through college, graduating with very little debt.
The Solution
Encouraging students to work their way through college instead of borrowing to make ends meet would decrease the overall debt held by young professionals. Less debt translates into more disposable income. That income could potentially make its way back into the economy at-large, and would insure that fewer college graduates find themselves seeking government aid to pay for food and housing.
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Bio: Alexis Bonari is a freelance writer and blog junkie. She is currently a resident education blogger and performs research surrounding College Scholarships. In her spare time, she enjoys square-foot gardening, swimming, and avoiding her laptop.
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