The federal government subsidizes some loans to college
students. Typically, the more students who participate
in these programs and the more they borrow, the higher
the cost to the federal government. In 2011, President
Barack Obama convinced Congress to pass these changes
to the federal student loan programs: (1) Payments were
capped at 10 percent of a borrower’s discretionary income;
(2) any unpaid balances for people working for government or in the nonprofit sector were forgiven after making
120 monthly payments (10 years’ worth of payments); and
(3) people working in the private sector had their loans
forgiven after making 240 monthly payments (20 years of
payments).
a. As a result of these changes in the federal student loan
program, would you predict that the total amount that
students borrowed under these programs increased or
decreased? Briefly explain.
b. As part of his 2016 federal budget proposal, President
Obama recommended significant changes to the federal student loan programs. Given your answer to
part (a), do you think President Obama was likely to
have recommended changes that would increase or
changes that would decrease the payments that borrowers would have to make? Briefly explain.
c. How might President Obama and his advisers have
failed to correctly forecast the effects of the 2011
changes to the loan programs?
Sources: Allesandra Lanza, “What Obama’s 2016 Budget Proposal
Means for Student Borrowers,” usnews.com, February 11, 2015; and
Josh Mitchell, “Student-Debt Forgiveness Plans Skyrocket, Raising
Fears over Costs, Higher Tuition,” Wall Street Journal, April 22, 2014.