Amid much fanfare this week, President Barack Obama unveiled a feel-good proposal at the expense of good or meaningful policy. Obama signed an executive order that will expand a program limiting the amount borrowers must pay on student loans. “We believe that in America, no hardworking young person should be priced out of a higher education,” the president said.
But while student debt is an important and growing issue, Obama’s executive order does little to make college more affordable for hardworking young people. Consider: The proposal isn’t new — it’s an expansion of an existing program to include people who took out loans prior to October 2007; only 1.8 million borrowers of about 17 million who qualify have enrolled in the previous program; and the plan targets a narrow percentage of the roughly 40 million people who have student loan debt. The mechanics, according to CNN, are that borrowers who sign up for the program will have their monthly payments capped at 10 percent of their income that is above 150 percent of the poverty line.
That’s not a bad deal. Then again, government-backed student loans long have been one of the most affordable investments available to consumers, with interest rates much lower than typical lending. In spite of that, outstanding education debt has reached about $1.2 trillion, and graduates from the Class of 2012 who took out loans for bachelors’ degrees owed an average of $29,500. If that is the case, perhaps a different tack is in order.
On the same day Obama was rolling out his executive order, a gathering was held in Seattle to celebrate the success of the Washington State Opportunity Scholarship, which provides up to $22,500 to low- and middle-income students pursuing high-demand STEM degrees (science, technology, engineering, math) in the state. The program is a public-private partnership driven by money from taxpayers and grants from Boeing and Microsoft. House Speaker Frank Chopp, D-Seattle, said: “Washington state is among the top in the nation for state-funded financial aid. But we just felt that it was important to challenge the private sector to also contribute money, as well.” Most important, the program is market driven. High-tech companies need well-trained workers in specific fields, so the state provides money to help train them.
The idea of pursuing degrees that are in demand also is one of the principles behind a proposal from U.S. Sen. Ron Wyden, D-Ore. Wyden last year proposed The Student Right to Know Before You Go Act, which would compile data such as student transfer rates, graduation rates, and average debt incurred by students at a particular school — and it would make that information available online. Perhaps most important, Wyden’s proposal would assess the expected future earnings for a specific degree — and earnings tend to help in paying down student debt.
Any of those steps would be more meaningful than Obama’s narrowly drawn executive order. In talking about student debt this week, the president said, “I don’t know why folks aren’t more outraged by this.” The reason is simple: The students (or their parents) took out the loans at favorable rates; nobody forced them to borrow money, so there is little public sympathy for those who are having trouble paying their debt. Consider it lesson No. 1 in personal finance in the real world. In the end, the WSOS and Wyden’s proposal present more effective ways to assist students, helping them to prepare for in-demand jobs that will allow them to pay their debt without federal accounting tricks.