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Obama Plan Would Cut Student-Loan Interest Rates .

Townhall.com Staff
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Posted: Oct 25, 2011 5:00 PM
Obama Plan Would Cut Student-Loan Interest Rates .

LOS ANGELES—President Barack Obama will announce a plan to allow people holding two kinds of student loans to reduce their interest rates by consolidating their debts into one government loan, officials inside and outside the administration said Tuesday.

Mr. Obama is to announce the move in Denver on Wednesday, part of a White House push to emphasize actions his administration can take to boost the economy without congressional approval. Education Secretary Arne Duncan and White House Domestic Policy Council Director Melody Barnes were scheduled to discuss the proposal later Tuesday.

The change could affect an estimated 5.8 million people who hold two types of student loans—government-backed loans issued by the private sector under the Federal Family Education Loan program and "direct loans" issued by the government, an administration official said. Consolidating the loans would result in lower interest rates and reduced monthly payments, as well as additional loan-forgiveness and repayment options.

The president also will announce an acceleration of an income-based repayment program. Existing rules allow graduates to limit their loan payments to 15% of their income, with all debt forgiven after 25 years of payments. Congress already has passed a change to that program that would allow borrowers in 2014 to pay 10% of their income, with all loans forgiven after 20 years. On Wednesday, Mr. Obama will announce that he is speeding up this program so it will affect students beginning next year instead of in 2014.

Neither change requires congressional approval, the official said.

Banks, credit unions and lenders could be affected by the president's plan in different ways. While some lenders might welcome having a loan paid off and taken off their books, other companies might not want to lose their assets. Shares of SLM Corp., parent of student lender Sallie Mae, were down 11% in afternoon trading on the New York Stock Exchange following reports of the Obama announcement. Shares of education-finance company Nelnet Inc. fell 5.6%.

Consumer groups have long favored action to allow more people into the federal loan program because of its more favorable terms. Many in the Occupy Wall Street movement also advocate relief for what can be crushing student debt.

Meanwhile, the U.S. Consumer Financial Protection Bureau is intensifying scrutiny of the student-loan market, seeking to help educate students about these loans while promising to crack down on lenders who intentionally trap students in unaffordable debt. The consumer agency plans a news conference Wednesday at the University of Minnesota, where it will describe a new project designed to help families understand the terms of college loans.

The focus on student loans comes as recent graduates, many facing a depressed labor market, will have to make their first loan repayments. Such a weak economic climate has led student-loan defaults to rise. In September, the U.S. Department of Education released data showing that the percentage of federal student-loan borrowers who defaulted in fiscal-year 2009 rose to 8.8% from 7% the previous fiscal year.

"Students are at a tipping point," said Rich Williams, the higher-education advocate for the U.S. Public Interest Research Group. "They're maxed out on their loans. They might drop out or take on even more unmanageable debt, and that will have an impact on the country."

Federal Reserve data show that households are cutting back on various forms of credit. But In June 2010, total student-loan debt exceeded total credit-card debt for the first time, according to Mark Kantrowitz, a financial-aid expert and publisher of FinAid.org and Fastweb.com.

"I was not expecting the two lines to cross until 2020," said Mr. Kantrowitz.

He also estimates that the average student debt at graduation this year was $27,000.

Mr. Obama proposed a similar change for student-loan consolidation in his fiscal-year-2012 budget request. The request argued that this change would simplify the system for many borrowers. "The repayment process for these borrowers involves complicated record-keeping and making payments to multiple student loan holders, putting these students at greater risk for default due solely to the administrative complexity of the repayment process," according to the budget request. It said the change would mean a savings of as much as 2% of participating borrowers' loan balances.

At Mr. Obama's urging, Congress in 2010 ended private lenders' involvement in the origination of federal student loans. But there are many people who already held student debt issued privately who could benefit by converting the loans into the government program, the administration official said.

The White House push on executive action comes amid frustration that Congress has failed to pass any elements of Mr. Obama's jobs plan despite weeks of effort trying to pressure lawmakers to act.

A spokesman for House Speaker John Boehner (R., Ohio) declined to comment until details were released in a formal announcement. Mr. Boehner, like most members of his party, opposed a Democratic effort last year to end subsidies paid to private student lenders.

—Victoria McGrane contributed to this article.