Washington
The Obama administration on Monday proposed increasing government support for college students who take low-paying jobs after they graduate, by charging them less for their loans and forgiving the loans earlier.
Administration officials announced the plan as part of a package of proposals to help "middle class" families that President Obama expects to outline next week in his federal budget recommendation for the 2011 fiscal year.
The president's new student-loan plan would sweeten a program known as income-based repayment, created by Congress in 2007, in which borrowers with a federally subsidized loan are required to make payments on the loan each year that total no more than 15 percent of their discretionary income. The new proposal could cut that maximum payment to 10 percent, and could allow those loans to be fully forgiven after 20 years of payments rather than the current 25 years.
"It's going to provide meaningful repayment relief for people who are struggling," said Mark Kantrowitz, publisher of FinAid, a Web site that provides advice on financial aid.
Administration officials said they would place no price estimates on their proposals before Mr. Obama issues his overall 2011 federal budget next week. Mr. Kantrowitz said he estimated that the reduced annual loan payments and the quicker timetable for loan forgiveness would cost the government about $1-billion over five years.
The president is making the proposal as he continues to wait for Congress to act on a far larger commitment to students that he made upon taking office a year ago. The administration asked Congress to eliminate the federal system that provides subsidies to private student-loan companies, saving the federal government an estimated $87-billion over 10 years. The president proposed devoting most of that money to increasing grants and lowering interest rates for students.
Senate Delays
The House of Representatives has passed a version of that bill, but Senate Democrats have postponed action while concentrating on health-care legislation. The Senate can use a process known as reconciliation to pass a measure with just a 51-vote simple majority if the bill reduces overall federal spending, but reconciliation can be used only once a session and Democratic leaders want to see if it will be necessary for the health-care overhaul before using it on the student-aid bill.
Mr. Obama's vice president, Joseph R. Biden Jr., outlined the new plan on Monday in his role as chairman of the White House Task Force on Middle Class Families. Other proposals in the plan, which Mr. Obama also plans to detail on Wednesday in his State of the Union address to Congress, include new tax credits for child care and a new system to help workers save automatically for retirement.
Mr. Biden said that such benefits for middle-class families were essential to shoring up political support for more costly benefits for lower-income families. "Pell Grants don't hang around a long time," he said, "unless you make sure those folks making $80,000 or $100,000 are able to send their kids to school too."
Under the middle-class plan's student-loan proposal, the proposed limit on borrowers' annual payments would mean the monthly payment for a single borrower who earned $30,000 per year and who owed $20,000 in loans would fall from $228 a month to $115 a month, Mr. Biden said.
The federal government now provides more than $85-billion a year in subsidized student loans. In addition to limiting the amount that low-income borrowers must repay on those loans, the changes approved by Congress in 2007 allow for loans to be forgiven entirely after 10 years of payments by workers in certain public-service jobs, such as teachers, police officers, and health-care workers.
New Cost Estimates
Meanwhile, the continued delays in Congress on legislation to enact President Obama's plan to eliminate the bank-based federal student-loan program could soon cost students and colleges billions of dollars they were hoping to receive. The Congressional Budget Office, a nonpartisan entity, is scheduled to issue its annual assessment of the costs of legislation on Tuesday, and it probably will reduce the $87-billion estimate it placed on the bill last year.
The reduction is likely because of factors that include the move over the past year by hundreds of colleges into the Education Department's direct-loan program, through which students receive loans without the use of private banks. Senate Democrats could put in place the new budget-office estimate immediately, sharply reducing the savings available to put into student-loan and grant programs, or wait a few more weeks until Congress approves its annual budget resolution.
Congress also is considering other steps that might help students, including one bill that would make clear that any loan payments forgiven by the federal government are not treated as income.
That was an oversight in the current debt-forgiveness measure, potentially subjecting low-income borrowers to huge tax debts the day their federal loans were fully absolved, said Richard T. Williams, a higher-education lobbyist at the U.S. Public Interest Research Group, a consumer-advocacy organization.
The administration's proposal to cut maximum payments from 15 percent of discretionary income to 10 percent also could leave some borrowers paying more money in the long term because they would be paying back their loans for a longer period, Mr. Kantrowitz said. But such instances would probably be rare, he said, given that current law already caps the repayment term at 25 years for low-income borrowers.
Comments
1. 11250382 - January 25, 2010 at 04:24 pm
Isn't this part of what got us into this mess to begin with? Insanity is doing the same thing over and over and expecting different results.
2. ustate05 - January 25, 2010 at 05:34 pm
Forgive all student loan debt after 10 or 20 years? Sounds all warm and fuzzy, but the reality is anything but. If this happens, college costs will rise at an (even more) ungodly rate, students will borrow more without the 'hassle' of paying it all back, and the federal government will end up footing the bill.
This proposal gets a 'D' - for Despicable, Desperate, and downright Dumb.
3. literateinit - January 26, 2010 at 07:27 am
This proposal does not forgive debt for all, but only for those who, paying based on income, cannot complete payment after 20 years. This already does kick in at 25 years and has for years under some repayment plans. But, as it states above, this will only affect those who fall below certain income thresholds. You know, the people who took on a large amount of student-loan debt but then could not find a job that allowed the debt to be paid without hardship. Actually, this might help to mitigate the default rate.
What is more despicable than forgiveness is allowing people to pay off loans for up to 30 years and at double the amount of the principle, people who don't necessarily take out loans willy-nilly, but because they have to in order to complete higher education. This program is only a minor extension of what has already existed, and it will help many people. If you look at the article and weigh the 1 vs. 87 billion related to these two student-loan issues, then you might see that the larger concern lies with lending practices, and not with repayment relief.
I finished my doctoral work with almost $98K in loan debt: I am a first-generation college graduate and come from a working-class background. My payment plan, before income-based repayment, was $504 for 30 years (do that math to locate "despicable"). My payment uder IBR is $474, and that will rise as my income does; ultimately, I will lose eligibility if I cross the income threshold before the 25 years are up, or if I end up paying the debt off as a result of the increase in income and, therefore, in payment. And unless something unforeseen happens, that will probably be the case. But it gives me relief in the short term, and it would provide a great deal of relief for those who are not as gainfully employed as I am.
4. gatesr - January 26, 2010 at 09:23 am
ANOTHER brainless program that penalizes those who succeed and enables those who sit back and expect others to subsidize their choices while spening what they can't afford!
5. cragie - February 14, 2010 at 10:10 am
This basic program has been in place for 15 years -- income-contingent repayment. Shows that some of the commenters assume in a knee-jerk sense that anything with the word "income" in it is "socialist." Nothing could be further from the truth. Why create a brand-new repayment plan instead of publicizing/fixing an existing one? First, that's what politicians do -- create new programs they can put their names on; there is little political upside to tinkering with an old program. Second, this was another giveaway to the lenders and guarantors in the ffel program. They were not permitted to participate in the income contingent repayment plan (it was direct loan only), because, understandably, the IRS did not want lenders and lender-servicers getting access to confidential IRS tax data. The ffel side did not even want this repayment plan, because income is pretty variable; it is much easier to sell or securitize a student loan if it has a more "normal" amortization and thus, on paper, a totally predictable repayment of interest and principal.
What changed by 2007? In large part the lenders and guarantors began to have second thoughts. FFEL was still going strong, and both conservatives and liberals alike, lacking a background or understanding of the program, felt "why not allow both FFEL and DL to do this, it is only fair?"
What about the IRS and the whole ideal of program integrity and verification of income? Largely out the door. If this repay plan proves to be as underutilized as income contingent repayment, then it won't be an issue, but, if it meets the original 1995 targets, for example, one-third of borrowers choosing income-based repayment, then we are looking at a program that may have a future of false income data coming from borrowers and not verified.
Part of the problem with income contingent repayment is that, at a relatively-low income level, the borrower was quickly paying more per month than what is normally the most costly monthly payment -- the straight 10-year repay plan. If IBR assists borrowers who, for some reason, do not understand or do not want the long-term straight-line repay plans, to access a more reasonable monthly payment and avoid ruining their credit, then how is that bad? In addition, where is the cost to the taxpayer? In the long run, lying about your income costs you because you pay more interest over time. It is true that in the ffel program this also means more taxpayer subsidies for a longer period of time, but ffel may be going away. In the dl program, the dynamic is the opposite - longer repayment plans earn the us treasury more interest. Finally, the forgiven debt is still taxable, cushioning the taxpayer on that end.