There was an expectation of a new announcement from the Obama Administration on student loans Wednesday, and we got a preview this afternoon. Responding, in the words of White House officials, to a petition at their new We the People petition site, the Administration will institute two new programs that could potentially save students who qualify hundreds of dollars a month on their student loans.
The Wall Street Journal explained the outlines of the plan today. But here’s the direct statement from the White House:
The Administration is moving forward with a new “Pay As You Earn” proposal that will reduce monthly payments for more than one and a half million current college students and borrowers. Starting in 2014, borrowers will be able to reduce their monthly student loan payments to 10 percent of their discretionary income. But President Obama realizes that many students need relief sooner than that. The new “Pay As You Earn” proposal will allow about 1.6 million students the ability to cap their loan payments at 10 percent starting next year, and the plan will forgive the balance of their debt after 20 years of payments. Additionally, starting this January an estimated 6 million students and recent college graduates will be able to consolidate their loans and reduce their interest rates.
As I said, there are two programs here. The first is income-based repayment. Under current law, graduates with student loans can opt to pay 15% of their income for 25 years instead of a monthly student loan repayment based on the cost of the loan. In the reconciliation sidecar to the Affordable Care Act, actually, this was reduced to 10% of income, starting in 2014. The plan announced under executive authority moves that date up to 2012, and changes the debt forgiveness end date to 20 years from 25. This would only benefit those who graduate college between 2012 and 2014; people who have already graduated or who are in repayment won’t benefit from this change. The Administration claims that 1.6 million graduates would be eligible for the new program.
Not a lot of borrowers have actually taken up income-based repayment, even though it’s a good way to manage payments. Of the 36 million Americans with student loan balances, only 450,000 have IBR. As much as this will lower payments for new graduates, the goal is to advertise IBR generally, to get more take-up. “We’re letting people know this is there for them, and letting them know that there’s a greater benefit being pushed up,” said White House Domestic Policy Advisor Melody Barnes on a conference call announcing the new plan.
The second program is an artifact of other changes in the Affordable Care Act’s reconciliation sidecar. In that bill, most student loans that people can access were converted from private loans to loans directly administered by the government. This has left many borrowers with two types of federal government loans – the Direct Loan (DL) and the Federal Family Education Loan (FFEL). These require separate payments but are both managed by the government. 5.8 million borrowers have the two types of direct loans. So the new program would allow those borrowers to consolidate the loan, and in the process receive a reduction in the interest rate of 0.5%. That translates into a slightly lower monthly payment. The savings from the consolidation of the loan (presumably in administrative costs) will pay for the move-up in the date for the new income-based repayment plan, so that the set of programs do not cost any additional taxpayer money. Borrowers with the two loans will be contacted by the government about the opportunity, and they will have from January and June of next year to make the consolidation.
On the conference call, Barnes hailed this “series of steps to help borrowers manage student loan debt and make it easier to repay student loans.” And she said it was a direct result of a petition signed by 30,000 Americans at We The People, the White House’s new petition site, asking for a reduction in the burden of student loans.
“We are building on the student loan reforms of last year,” said US Education Secretary Arne Duncan on the call. And this does build on those reforms. The consolidation just seems like common sense, with a small 0.5% interest rate sweetener in it. The move-up of the date on income-based repayment is a belated acknowledgement that people need help immediately, and back-dating all of these programs to save money is a dumb idea.
But it’s a fairly narrow plan. If you just have one type of federal loan, you don’t get the interest rate reduction. If you’ve already graduated, you can’t get the new income-based repayment. This, of course, is what you get when you use regulatory authority instead of statutory changes in the law.
There are some good consumer education elements added to this. The Consumer Financial Protection Bureau will institute a Know Before You Owe program, basically a draft of a financial aid disclosure form that colleges and universities can provide to students so that they can compare aid packages and comprehend their choices better. It would show total estimated debt, monthly payments after graduation and what financial aid does and does not cover. There are a couple other associated public education programs rolling out with this.
Overall, it’s a small but relatively sensible program to reduce student loan debt. And given that student loan debt is one of the signature laments of the 99% movement, it’s probably decent politics.
UPDATE: It’s good to look at some hypotheticals here, which the White House has provided in a fact sheet:
A nurse who is earning $45,000 and has $60,000 in federal student loans. Under the standard repayment plan, this borrower’s monthly repayment amount is $690. 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.
A teacher who is earning $30,000 a year and has $25,000 in Federal student loans. Under the standard repayment plan, this borrower’s monthly repayment amount is $287 . The currently available IBR plan would reduce this borrower’s payment by $116, to $171. Under the improved ‘P ay As You Earn’ plan, his monthly payment amount would be even more manageable at only $114. And, if this borrower remained a teacher or was employed in another public service occupation, he would be eligible for forgiveness under the Public Service Loan Forgiveness Program after 10 years of payments.
The Public Service Loan Forgiveness Program is a separate law for which graduates would be eligible anyway. The bigger point here is that you’re talking about a $120-$125 a month benefit, with what was announced today, for someone making the median income, and even less, more like $55-$60 a month, for someone below that median income. And the 0.5% reduction in the interest rate on loan consolidation is even less of a benefit on a monthly basis, probably not even $1,000 over the life of the loan. This is nice, but isn’t that big a deal from a macroeconomic perspective. Even if a million people take advantage of income-based repayment, you’re talking about an annual benefit of right around $1 billion, if that. Even if all 5 million eligibles consolidate their loans, it’s much less, maybe $5 billion over 20-25 years. And consolidates presumably means cuts to jobs of the people processing multiple sets of student loans, though on that point I’m not sure (but where else would the savings come from).
What IS a big deal is getting people into the income-based repayment plan generally. That can save people a lot of money, and the President calling attention to it can highlight that.