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President Obama’s plan to cap student loans could substantially lower payments for thousands of UC Irvine graduates and provide a powerful incentive to students considering a job in public service.

If Congress responds to Obama’s push in last night’s State of the Union address, the new rules could dramatically reduce monthly loan payments as early as next year for millions of former students across the country.

A graduate owing $30,000 and earning $25,000 a year, who might otherwise owe $345 a month, would see their monthly payment capped at $73. And if they worked in government or for a non-profit organization, whatever portion of the loan that remained unpaid after ten years would be forgiven.

“In the United States of America, no one should go broke because they chose to go to college,” Obama said in his State of the Union address Wednesday night, drawing a standing ovation from both Republicans and Democrats. “And by the way, it’s time for colleges and universities to get serious about cutting their own costs because they too have a responsibility to help solve this problem.”

The proposal comes at a crucial time for many UC students who face a 33 percent increase in tuition and increasingly bleak job prospects upon graduation.

Obama’s plan calls for limiting payment on student loans to no more than ten percent of that portion of their salary that exceeds $16,245, which is 150 percent of the poverty rate. Anyone making less than that amount would owe nothing. A former student earning $35,000 a year, for example, would owe no more than ten percent of $18,755 ($35,000 minus $16,245) which comes to $156 a month.

Former students with families would see their payments reduced even more dramatically, as the poverty rate is much higher for families. A graduate with a family of four would not need to pay anything on their student loans until their salary climbed above $33,075, and even then would only need to pay ten percent of the amount that exceeded that amount.

In addition, the plan forgives loans — no matter what the remaining balance — after ten years for those working in government or non-profit jobs. Those working in the private sector would have their loans forgiven after 20 years.

“Students should understand that there is a safety net from student loans, and that these high debts won’t keep them from a job in the public sector,” a senior administration official said.

A federal program which took effect last summer allows graduates to limit their payments to 15 percent of their income and forgives loans after 25 years. Eligibility and loan calculators can be found at IBRinfo.org. Obama’s proposed caps are far more beneficial and would likely be taken advantage of by many more borrowers.

“It’s a good proposal that will help as much as a quarter of borrowers by reducing their monthly payments by a third as compared with the current income-based repayment,” said Mark Kantrowitz, a student loan expert and publisher of FinAid.org, a guide to financial aid.

The White House said they could not estimate the proposal’s cost until the budget is released next week. Kantrowitz estimated the five-year cost to be between $1 billion and $2 billion. The proposed student loan reform is among the recommendations of Obama’s Middle Class Task Force chaired by Vice President Joe Biden, which issued its report Monday. The plan is likely to be greeted warmly by lawmakers looking to bolster their standing with middle class voters in an election year.

“These proposals are welcome news for the millions of families whose retirement and college savings were devastated by the financial crisis,” said Rep. George Miller, D-Martinez, who chairs the House Education Committee.

The loan proposal is aimed at reducing the burden on middle class families struggling to pay back federal loans. About one half of all students take out loans and graduate with an average of $23,000 of debt, according to FinAid. UC students graduate with significantly lower debts, averaging $15,000 per student, according to the UC Office of the President.

The proposal is also aimed at steering students into public sector jobs, which in many cases are limited to those who can afford to accept the lower salaries.

Former students are eligible for public service forgiveness if they work for a tax-exempt or non-profit organization, public schools, government at any level, as well as anything that provides a public service such libraries, public health or safety. Teaching at a public university would qualify.

“[The proposal] could not come at a better time, as the weak economy and high unemployment are making it harder than ever for people to make month payments on their student loans,” said Laura Asher, president of the Institute for College Access and Success, an independent organization based in Berkeley.

If Congress passes the law this year, it could take effect on July 1, 2011, according to the senior administration official.

The California News Service is a journalism project of the University of California’s Washington Center and UC Berkeley’s Graduate School of Journalism. E-mail CNS at CNS@ucdc.edu

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