When President Obama touted his two-pronged student debt relief measure before thousands of students Wednesday at the Auraria Higher Education Campus in downtown Denver, he got rounds of applause.
Policy analysts, however, cautioned that implementation of the “Pay-As-You-Earn” part of the measure is potentially problematic. They also note that not all borrowers are going to be able to benefit from the measures, and, of those who are eligible, not all of them should pursue the relief being offered.
Those were just some of the caveats offered amid the hype over the president’s proposed measures to ease the burden of monthly student loan payments for multitudes of students.
“It’s hard to figure out how this will work because it’s dependent on students themselves and the circumstance they’re in,” said Alisa Cunningham, Vice President of Research and Programs at the Institute for Higher Education Policy (IHEP).
President Obama on Wednesday said that his administration would “speed up” an income-based repayment (IBR) provision of a law the administration already got passed by Congress that would permit borrowers to cap their student loan payments at 10 percent of discretionary income—down from 15 percent as it is currently. Originally, the lower repayment option was supposed to take effect July 1, 2014.
“We’re going to make these changes work for students who are in college right now,” Obama said to applause in his Denver speech. “We’re going to put them into effect next year, because our economy needs it right now and your future could use a boost right now.”
“Because of this change,” President Obama continued, “about 1.6 million Americans could see their payments go down by hundreds of dollars a month—and that includes some of the students who are here today.”
The operative word was “some.”
Under the proposed rule, only students who took out loans in 2008 or later, and then who also take out loans in 2012 or later, will be eligible, said Sara Gast, a spokesperson for the U.S. Department of Education.
When asked for the rationale behind the eligibility requirements, Gast said it was “in order to catch a lot of borrowers who went to school during the hardest economic period and now are trying to find jobs.”
“That’s really the group we wanted to capture,” Gast said.
The administration provided two examples of how the proposed measure would benefit students.
The first example was of a nurse earning $45,000 and has $60,000 in federal student loans.
“Under the standard repayment plan, this borrower’s monthly repayment amount is $690,” a U.S. Education Department fact sheet says. “The currently available IBR plan would reduce this borrower’s payment by $332 to $358.
“President Obama’s improved ‘Pay As You Earn’ plan will reduce her payment by an additional $119 to a more manageable $239—a total reduction of $451 a month.”
The second example was of a teacher who is earning $30,000 a year and who has $25,000 in federal student loans.
“Under the standard repayment plan, this borrower’s monthly repayment amount is $287,” the Education Department says. “The currently available IBR plan would reduce this borrower’s payment by $116, to $171. Under the improved ‘Pay As You Earn’ plan, his monthly payment amount would be even more manageable at only $114.”
Schoolteachers and others employed in public service would have an additional benefit—forgiveness under the Public Service Loan Forgiveness Program after 10 years of payments.
For the remainder of students, forgiveness would be granted after 20 years of repayments as opposed to 25 years of repayments under current law.
Pauline Abernathy, vice president of Washington, D.C.-based The Institute for College Access & Success (TICAS), said the measures underscore “that federal loans can be a powerful tool for keeping college within reach.”
“It’s important that students are maximizing their federal loan options before even considering a risky private student loan,” Abernathy said. “None of these types of repayment options are available under private student loans, which make them one of the riskiest ways to pay for college.”
Cunningham, of IHEP, said it’s important to get the word out to students who are likely to need or who will benefit from the new measure.
However, she said experience shows that students don’t always get informed of existing tools to ease student loan repayments, such as forbearance and deferments, so communicating these new options will be key.
“If that’s done well, that will be an improvement,” Cunnigham said.
The administration also notes that IBR is currently underutilized.
“Currently, more than 36 million Americans have federal student loan debt, but fewer than 450,000 Americans participate in income-based repayment,” the Education Department notes. “Millions more may be eligible to reduce their monthly payments to an amount affordable based on income and family size.
“The administration is taking steps to make it easier to participate in IBR and continues to reach out to borrowers to let them know about the program.”
Beyond getting the word out, part of the message has to be that not all the options offered through the Obama administration’s measures are right for all borrowers, said financial aid guru Mark Kantrowitz, creator of the FinAid and Fastweb websites.
Kantrowitz said that the second part of the Obama administration’s new student loan plan, which enables students to consolidate their bank-based federal student loans and their Direct Loans—and thereby save 0.5 in interest payments—is not universally advantageous.
“Not everybody should consolidate,” Kantrowitz said. “If you’re able to repay your student loans and you want to accelerate payments on the most expensive loans, you can only do that if they’re separate.”
Consolidating the loans may make for easier payments, but the savings students would make from targeting their most expensive loans for earlier repayment “probably exceed” the 0.5 interest rate reduction that students are being offered if they consolidate their bank-based and Direct Loans, Kantrowitz said.
“If you’re not able to do that, then moving (both loans) to Direct Loan makes sense,” Kantrowitz said.
Kantrowitz was critical of the fact that the Pay-As-You-Earn relief would only be extended to students who took out a loan after 2008 and who take out additional loans in 2012.
“I believe that there are people that could benefit from income-based repayment who won’t be able to benefit because the way this is coming out,” Kantrowitz said.
While the Obama administration said this week that it bypassed Congress in taking the steps to ease monthly student loans because “we can’t wait on congressional Republicans to act,” the GOP also levied criticism at the measures.
“Despite the administration’s rhetoric, this plan will not create a single job, strengthen our economy or promote fiscal responsibility,” said Rep. John Kline, R-Minn., chairman of the U.S. House Committee on Education and the Workforce. “What this plan will do instead is encourage more borrowing across the board. That means more debt for students, more debt for taxpayers, and more red ink on the government’s books.”
Abernathy, of TICAS, said that the proposed lower monthly payments with forgiveness after 20 years are subject to a process known as “negotiated rule-making,” which she said is not likely to start until January and will take months to complete.
“Under the rules for negotiated rule-making, if the negotiators do not reach consensus on all the issues, the administration can draft the regulations on its own and proceed to finalize them, so the administration’s proposal or some version of it is likely to be implemented,” Abernathy said. “Congress would have to pass legislation to block the proposal, and Congress is unlikely to deny repayment relief—that can be provided at no additional cost to taxpayers—to students entering a tough job market.”
Gast, of the Education Department, said information on meetings on the negotiated rule-making for lower monthly student loan payments will be posted on various websites, including the Federal Register, in the near future, but said she did not know an exact date.