In a package of final regulations being released on Thursday, the Department of Education will formally establish the Obama administration’s new “Pay as You Earn” income-based repayment program, which will help many student-loan borrowers.
Included separately in the package are provisions that will make it easier for disabled borrowers to have their loans forgiven.
Under the existing income-based repayment program, eligible student-loan borrowers can have their monthly payments capped at 15 percent of their income, and they can generally receive loan forgiveness after 25 years of payments.
In 2010, Congress changed the income-based repayment program so that borrowers would pay less each month (10 percent of discretionary income) and obtain loan forgiveness sooner (after 20 years of payments).
Those changes will take effect for new borrowers in 2014, but the Obama administration is using its executive authority and some regulatory maneuvering to bring virtually identical benefits to many other student-loan borrowers.
Regulations being published on Thursday in the Federal Register establish the new repayment program, which is now officially dubbed “Pay as You Earn,” the slogan President Obama used to announce the policy last fall. The program, which will take effect as soon as this fall, will accept people who borrowed new student loans after October 1, 2007, and who also took out a loan on or after October 1, 2011.
A Windfall for Some Borrowers?
In recent months, consumer advocates and government officials have sought to better publicize the availability of income-based repayment programs as a way to deal with mounting student debt.
The Department of Education, for instance, has developed an online tool that allows borrowers to automatically enter their tax data into an application to participate in the program.
Income-based repayment has also been touted by Mr. Obama’s re-election campaign, which has framed it as an important component of the president’s policies to make college more affordable and ease the burden of student debt on young graduates. The campaign started a Web site where voters can enter their income and federal student-loan debt into a calculator to see how much lower their monthly payments would be under the new Pay as You Earn repayment plan.
But the changes in the income-based repayment programs have also attracted some criticism. A report released in October by the New America Foundation said that the changes would provide only marginal benefits to low-income borrowers but would be a windfall for high-income borrowers who would be able to have large amounts of debt forgiven. According to the report, the changes in the program would enable institutions, especially expensive graduate and professional schools, to keep tuition high, since students could simply borrow more without incurring the full cost of their loans.
In the final regulations coming out on Thursday, the department acknowledges such criticism, writing that the income-based repayment options “may encourage higher borrowing and potentially introduce an unintended moral hazard, especially for borrowers enrolled at schools with high tuitions and with low expected income streams.”
However, the department said it had “not found any definitive studies on the matter” but was including that language because some analysts and academics had raised the possibility.
The department said it would put the new regulations into effect “as soon as possible” and publish a separate Federal Register notice to announce when the plan becomes available to borrowers.
Help for Disabled Borrowers
The provisions affecting disabled borrowers will streamline the process under which people who experience a “total and permanent disability” can have their student loans discharged. Under the new rules, which will take effect in July, borrowers with federal loans will have to submit only one discharge application to the Education Department, rather than having to notify each lender and guarantee agency separately.
A February 2011 investigation by ProPublica and other nonprofit groups, published by The Chronicle, found that the loan-discharge process for disabled borrowers was burdensome and difficult to navigate. The department said that “significant public criticism” had prompted it to take a closer look at the process and to develop regulations to fix it.