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SnoopyHow Obama’s Student Loan Plan Impacts MBAs

“Happy days are here again!”

You can almost picture Wharton MBAs breaking into song after President Obama announced plans for easing student debt burdens. Carrying an average debt load of $118,100, Wharton’s 2013 graduates will be among the biggest beneficiaries of Obama’s “Pay As You Earn” (PAYE) program, which was expanded by executive order on Monday.

It will take effect in December 2015.

Originally signed into law in 2012, PAYE will now cover loans taken out before October 2007. The program also enables debtors to hold their monthly student loan payments at 10% of their discretionary income. The PAYE program will offer an alternative to debtors already eligible for the Income-Based Repayment (IBR) program, which is set to 15% of discretionary income

The Federal government estimates that the order will extend a 10% rate to an additional five million borrowers. As part of the program, students working in the private sector will have their loans forgiven after 20 years (with the public sector being 10 years). With IBR, forgiveness occurs after 25 years.

For MBAs, these lower payments offer serious benefits. For starters, it frees recent graduates to accept lower-paying jobs in less glamorous industries (or even start companies themselves). Even more, it makes public service more attractive to debt-conscious grads. “It removes the debt as a disincentive to go into that public service job,” Mark Kantrowitz, a senior vice president of Edvisors tells Bloomberg Businessweek.

That said, graduates from elite business schools will gain the most from this change. According to U.S. News & World Report, the highest student debts came from top-20 programs, including Fuqua, Darden, Sloan, Tuck, Ross, and Stern, with average debt ranging from $108,186 to $93,832 among these schools. As a result, graduates carrying higher debts will pay nearly the same rate as students who graduated from less expensive institutions, according to Bloomberg Businessweek:

“Take, for example, an MBA graduate who has a high debt load of $180,000 and a mid-level job paying $80,000 a year at a private company. Under PAYE, she will pay $427 per month. That’s the same monthly burden as someone who owes $80,000 but earns the same amount, calculates Jason Delisle, director of the Federal Education Budget Project at the New America Foundation, a nonpartisan public policy institute. And since both alums will stop paying after 20 years, the first borrower will end up paying a much smaller portion of her total loan amount.”

Unfair? Maybe. But you can bet this will be part of some school’s sales pitch!

Of course, MBAs have it easy, compared to other disciplines. Law students, on average, accrue $140,616 in debt, according to a report from the New America Foundation. Overall, median graduate student debt averaged $57,600, with business schools (as a whole), coming in at $42,000, according to that same report. In short, MBAs will benefit, to an extent, from this program. In the bigger picture, it is only a buoy. Real reform is still a long way off.

DON’T MISS: How Much Will You Have to Borrow?

Source: Bloomberg Businessweek

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