Obama's student loan debt-relief plan: Too good to be true?

President Obama on Wednesday is launching a new plan to lower the cost of paying back student loans for millions of borrowers – the latest installment in his bid to move a jobs agenda that bypasses a gridlocked Congress.

At nearly $1 trillion, federal and private student loans now exceed US credit-card debt, posing a formidable repayment burden for many borrowers at a time of near-double digit unemployment.

The plan, to be implemented by executive authority alone, allows some 1.6 million students to cap their loan payments at 10 percent of their discretionary income starting in 2012. It also forgives the balance of student loans after 20 years of payments. Current law allows students to limit loan payments to 15 percent of income, forgiving debt after 25 years of payments, though few students are aware of this option

In a related move, the US Department of Education, which now administers all federal education loans, is giving borrowers the option of consolidating federal and private loans at reduced rates.

“College graduates are entering one of the toughest job markets in recent memory, and we have a way to help them save money by consolidating their debt and capping their loan payments,” said Education Secretary Arne Duncan on a conference call with reporters on Tuesday. “And we can do it at no cost to the taxpayer.”

Even before the official rollout of the program at a rally in Denver, House Republicans challenged how the president could move forward without congressional approval.

"The president is about to announce a major change in the program that we have not yet acted on in the Congress,” said Rep. Virginia Foxx (R) of North Carolina, who chaired an oversight hearing on Tuesday. “What authority does the department have?”

“I can’t answer that question,” said witness James Runcie, the Education Department’s federal student aid chief operating officer. “Whatever we’re told to do in terms of implementation and execution, we’ll optimize and do what’s in the best interest of borrowers and students.”

Part of the answer appears to be a move made by the Democrat-controlled Congress in March 2010. It ended taxpayer subsidies to private banks for student loans, meaning that the Education Department alone was responsible for handing out government money for such loans. That means the $60 billion set to go to private banks for student loans during the next 10 years is now tabbed for the Education Department.

Congress directed the Education Department to use that savings to expand Pell grants for low-and moderate income students to attend college. But many House Republicans who still oppose the move they say it has made the Department of Education one of the largest banks in the nation, largely unaccountable to Congress.

“This is another example of the Obama administration making changes to federal education policy behind closed doors,” said GOP committee spokeswoman Alexandra Sollberger in an e-mail. “We are disappointed that the Department of Education chose not to engage committee members prior to announcing this plan to the press.”

Republican critics also note that the Education Department charges 6.8 percent for loans that cost much less, “creating a pretty big slush fund for the government,” said Rep. John Kline (R) of Minnesota, who chairs the House Education and Workforce Committee, at Tuesday’s hearing.

He tabbed federal borrowing for the program “at less than 1 percent” – yielding a large profit.

Education Department officials dispute that view. “Right now Direct Loans reduce the deficit,” says Education Department spokeswoman Jane Glickman. “I wouldn’t call it slush.”

The 10-year interest rate is dictated to the department by the White House's Office of Management and Budget (OMB), added Ms. Glickman in an e-mail. “In yesterday’s market, the 10-year rate was between 2 and 2.5. In the OMB projections, it is more like 3 for 2011.

The burden of some $1 trillion in outstanding student loans – up from $500 billion just five years ago – is a hot issue in the Occupy Wall Street protests. Students struggling with loans they can’t afford to repay blame the federal government for stripping away consumer protections

“Every fundamental consumer protection has been specifically removed by our Congress for student loans,” says Alan Collinge at the Zuccotti Park protest site in New York on Sunday.

“It’s led to horrible outcomes for the borrowers,” he adds. “The political will to crack down doesn’t exist.”

President Obama said in a statement on Tuesday: “Steps like these won’t take the place of the bold action we need from Congress to boost our economy and create jobs, but they will make a difference."

Unlike mortgage or credit-card debt, student loans can’t be eliminated through bankruptcy proceedings. With a sputtering economy, the investment in college doesn’t always pay off for students. In an interview on NBC’s “Meet the Press" on Sunday, GOP presidential hopeful Ron Paul called federal student loans a “failed program,” because it enabled colleges and universities to inflate costs.