A new White House initiative hopes to alleviate the pressure student debt places on recent grads. Will it do enough?
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Today President Obama outlined a new effort that he believes will help the country's youth manage their student debt and enable them to consider starting a company as an option after school.
The program, titled "We Can't Wait," will modify the federal government's "income-based repayment" plan, which allows qualifying students to pay back loans using a monthly percentage of their discretionary income, rather than a flat monthly payment. Currently, eligible students are eligible to cap their loan payments at 15 percent of their discretionary income, but the new proposal calls to lower that number to 10 percent. The plan, which goes into effect on Jan. 1, will also forgive the balance of eligible student's debt after 20 years of payments, as opposed to 25 years, which is what current law allows.
Tom Kalil, the deputy policy director at the White House Office of Science and Technology Policy, says this new plan will "enable young entrepreneurs not just to get a job, but to create jobs." And Ellen Kim, a senior advisor at the Office of Investment and Innovation in the Small Business Administration, says that "reducing monthly student loan amounts can buy an entrepreneur several months of runway in terms of operating and getting businesses running."
The initiative is certainly a boon to current and soon-to-be graduates worrying about loans, especially the 1.6 million young adults that qualify for the plan, most of whom who currently hold low-paying jobs. (You can use this calculator to find out if you're eligible, based on your income, federal student loan debt, and interest rate.) A White House press release speculates that some young people could even begin saving "hundreds of dollars each month."
But does the plan do enough?
The total amount of money borrowed by students in the United States in the 2008 to 2009 academic year grew by about 25 percent over the previous year while the average tuition price tag grew six fold since 1981. The average price of tuition and fees at a private four-year college is $27,293, and $7,605 at an average public college, according to the College Board. The cost of college has also risen nearly three times the rate of the cost of living, according to the National Center for Public Policy and Higher Education. In short: college is more expensive than ever, and more students are taking out more loans to pay for it.
Peter Thiel, the famed Silicon Valley investor who backed Facebook in its scrappier days, made headlines earlier this year when he announced his "20 Under 20" program, a plan to pay 20 young students $100,000 to leave college and pursue their start-ups.
"Student debt in America has surpassed even credit card debt," said Peter Thiel, the famed Silicon Valley investor who backed Facebook, when he announced earlier this year his '20 Under 20' program to pay students $100,000 to leave college and pursue their start-ups. "It saps creativity and innovation because it makes people afraid to take even limited financial risks, like those involved with starting a company," he added. "For the past few years, I’ve worried that the rate of innovation may be slowing down, and such a slowdown could lead to more economic stagnation."
A 2007 study by Princeton economist Jesse Rothstein supported Thiel's claim, finding that "debt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid public interest jobs," and reduced the likelihood of students launching their own companies.
Vivek Wadhwa, director of research at Duke University's Pratt School of Engineering, concurs, based on personal experience. "A lot of my students are afraid to start companies because of their student-loan debt," he told Inc.com.
So it's hard not to wonder if the White House's revised income-based repayment plan is akin to putting a Band-Aid on a broken leg.
The government recognizes it will need a boost from the private sector. The public-private Startup America Partnership led by Steve Case and the Kauffmann Foundation has already mobilized $730 million in private sector commitments.
As part of the "We Can't Wait" initiative, the White House also announced an unusual partnership with Gen Y Capital Partners, an early stage venture incubator for Generation Y founded by Scott Gerber, the founder of the Young Entrepreneur Council.
"America's youth are facing a crisis of epidemic proportions right now that nobody until recently had given attention to," Gerber says. "We risk losing America's young entrepreneurs because of college student loan debt."
The Gen Y $10 million fund, which hopes to invest in 100 startups over the next five years, will pay for a founder's federal student loan debt obligations for up to three years so they can concentrate on their companies during the crucial start-up phase. It will also offer young entrepreneurs the chance to live, rent-free, on college campuses around the country, and provide them mentorship.
The Small Business Administration is, in its own small way, contributing to the effort, too: It recently launched a website to walk young entrepreneurs through the process of reducing their monthly student loan payments.
For now, the White House's Kalil is hopeful this plan will do enough.
"The combination of lowering student debt, making it easier for young entrepreneurs to raise capital in small amounts using online platforms, and major commitments by the private sector are going to dramatically improve the [start-up] environment," he says.