President Obama made a politically smart move last week when he announced a three-part plan to make it easier for people to pay their student loans. The plan includes an income-based cap on monthly payments, loan consolidation, and a consumer education campaign on student financial aid. Obama had nothing to lose and everything to gain in rolling out the changes, which can be executed without the help of Congress. He can appeal to the youth voters who helped put him in office and he can beat up lawmakers for doing nothing. But, as my colleague Stacy Kaper wrote about the plan, the actual changes are modest. At most, only 8 million out of 36 million borrowers would see their payments change as a result of debt consolidation or the income-based cap.
Obama's announcement provides fodder for a broader conversation about two things--the costs and benefits of higher education and the need for a Personal Finance 101 course for all students.
On higher education, Obama made the obvious point. "College isn't just one of the best investments you can make in your future. It's one of the best investments America can make in our future." It's true that college graduates have higher wages, contribute more to economic growth, and are less likely to be unemployed. But it's also true that the cost of college is way out of proportion with peoples' incomes. At some point, the price of college becomes counterproductive.
On personal finance, I can only say this about the Consumer Financial Protection Bureau's Know Before You Owe financial aid tip sheet for students: Why isn't this standard fare for everyone? The CFPB tip sheet will advise prospective students on their total estimated debt burden, monthly loan payments after graduation, and additional schooling costs. I would submit that all borrowers should have access to that information, at a minimum, before taking out a loan.
Student loans are an important tool to get more kids through college. What else can be done to make sure students have the best information about their financial aid options? What are the essential components of a Personal Finance 101 course? Can the escalating costs of college be justified in any way? At what point does a student's debt obligation make college no longer worth the price?