Obama’s New College Loan Program

Obama mentioned that as of January 2012, student loan re-payments will be limited to 10% of income, and any left over balance after 20 years, would be forgiven. Sounds good, similar to the current plan that already exists for some loans and some non-profit employment situations after 10 years. So the new plan seems to expand this to more people, but probably only some federal loans. More details are forthcoming, but how would the math work out? The answer is hard to tell, no one knows how much money they are going to make for the next 20 years. But for the fun of it, let’s assume a modest starting income of $25,000 (about $12 per hour), and increased 3% per year for 20 years: income increased to $43,838. Total payment if limited to 10% of income would total to $67,175.  The next part of the calculation I am not totally sure of: how is the loan calculated? Is unearned interest capitalized back into the loan? What will the interest rates be over the next 2o years?  To keep it simple, (but taking some chance of mathematical error), let’s assume a low 3% interest rate, loan calculated annually (not monthly payments), and a $50,000 loan. I calculate that the amount of loan left after 20 years is approximately $2,600. Not a big forgiveness – no big deal. Sounds better from the podium than in actuality. But wait… this has me thinking, what would stop me from borrowing a lot more, and take it easy my college years, not working to minimize loans- heck I will be limited to pay back only $$67k, party hardy!?  I’m sure there are more details to work out in the days and months to come. Stay posted. I think politicians of both parties need to take more math courses before being elected to office!