Obama's changes to student loans: What they actually mean

President Obama announced changes to student loans on Wednesday, that will come into effect in January. However they will only apply to federal, rather than private student loans, and changes to the repayment program will only benefit the poorest.

On Wednesday President Obama announced some changes regarding two aspects of federal student loans which will come into effect in January 2012. Full details of the changes are outlined at Insider Higher Ed. Considering the way in which his speech has been interpreted it was in fact rather misleading. Taxpayers who believe that students have a responsibility to repay their loans in full are now under the impression that student loans will be paid off by taxpayers, whilst those with private student loans will experience not an iota of help. Obama said in his statement “we’re going to take steps to consolidate student loans so that instead of paying multiple payments to multiple lenders every month — and let me tell you, I remember this. 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. 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.”(AJC) In reality the consolidation loans Obama announced will only apply to federal student loans, including those that were taken out from guaranteed sources prior to federal loans being issued directly by the U.S. Department of Education. Private student loans, the most worrisome debt that students and graduates face, will remain ineligible for any consolidation within federal student loan packages. The touted saving of half a percentage point in interest is in fact just one quarter of a percent. The other quarter percent is already available to any student or graduate who elects to repay their loans through direct payments. At the same time the interest rate on federal student loans is set to increase to 6.8 percent from next year. The other change that Obama introduced is to reduce the minimum payment under the federal direct loan repayment program from 15 percent to 10 percent of discretionary income. The total repayment term will additionally be reduced from 25 to 20 years before any remaining portion of federal student loans is forgiven. However the income repayment program only applies to graduates on very low incomes who fail to make enough of a salary increase over the 20 years to cover more than a basic 10 percent of income payment. The primary issue that many students face is falling into the trap of taking out private student loans at high interest rates and with the necessity in most cases of a guarantor co-signing the loans. These private loans are not subject to any tampering from the government but will remain under the remit of private lenders.