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Details Emerge on Student Loans Plan

The Wall Street Journal has some of the specifics from President Obama’s student loan plan, which he’ll formally announce tomorrow at Auraria campus in Denver, Colorado. It sounds like he’s going to use executive power to institute a new loan consolidation program, and bump up the start date for an income-based loan repayment initiative that’s already been approved by Congress:

The change could affect an estimated 5.8 million people who hold two types of student loans—government-backed loans issued by the private sector under the Federal Family Education Loan program and “direct loans” issued by the government, an administration official said. Consolidating the loans would result in lower interest rates and reduced monthly payments, as well as additional loan-forgiveness and repayment options.

The president also will announce an acceleration of an income-based repayment program. Existing rules allow graduates to limit their loan payments to 15 percent of their income, with all debt forgiven after 25 years of payments. Congress already has passed a change to that program that would allow borrowers in 2014 to pay 10 percent of their income, with all loans forgiven after 20 years. On Wednesday, Obama will announce that he is speeding up this program so it will affect students beginning next year instead of in 2014.

These aren’t exactly radical proposals. It sounds like Obama’s more interested in checking off another item on the campaign to-do list (call this one “Make token gesture on student loans”), rather than making more necessary substantial changes. And in case it wasn’t clear enough this is a purely political move, Obama is pushing forward the date that the repayment program begins by two years, to his reelection year.

But the plan also has problems from a policy angle. Increasing the number of student loans that will be forgiven without full repayment is both a moral hazard (by encouraging risky borrowers to enter the system) and an additional burden on taxpayers. It’s also another step toward total forgiveness of student loans, which is one of the top demands from Occupy Wall Street activists. That idea doesn’t go over as well with most Americans, who oppose the deal by 66 percent, according to a Rasmussen poll out today.