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Obama’s Executive Action Falls Woefully Short

On June 9, 2014, President Obama took action to make college more affordable. Can we call this what it really it is? It’s an act to make student loans more affordable.   This act in no way makes college any more affordable than it already isn’t.

What the President did was expand a program he initiated a few years ago – Pay-As-You-Earn (PAYE). Let’s backtrack a bit so we can understand what occurred and really compare the helpfulness of it.

Original Repayment Plans

Back in the day (pre 1993), federal student loans had a few repayment options, all of which were based on the balance of the loan. In other words, it was just like any other consumer loan. At the time, these loans could also be discharged in bankruptcy, though a minimum repayment term was required. Unfortunately, bankruptcy discharge for federal student loans was done away with in 1998, unless the borrower showed an undue hardship.

1993

In 1993, a new repayment plan was born. This new plan, called the Income Contingent Repayment Plan and better known as ICR or ICRP, was still based on the balance due but also took into account the borrower’s income. This plan was, and continues to be, very under advertised.

2009

Fast forward to 2009 and the introduction of a brand-new repayment plan: Income Based Repayment or IBR. This program uses only the borrower’s income to determine a monthly payment. The formula calls for 15% of discretionary income to be used for Federal Student Loan repayment. IBR (and ICR) also came with a 25-year forgiveness. Again, IBR suffered from the same problem as ICR, complete and utter lack of advertising.

2010

PAYE takes the 15% for IBR and reduces it to 10%. It also reduces the forgiveness from 25 years to 20 years. The problem with PAYE is the eligibility. It is for new borrowers only – meaning only those who had no loan balance prior to October 2007 AND took a new loan after October 2011. Essentially it is for graduates of the class of 2013 and newer. Obviously, PAYE didn’t really help a whole lot of folks.

2014

Obama’s newest executive action opens up the eligibility for PAYE to help more folks. According to the press, it will only help 5 million of the roughly 34 million borrowers. That means it won’t help the majority of borrowers. I don’t call that a fix. This is really like removing a bloody bandage, replacing it with a larger one, and hoping the bleeding will subside eventually. It won’t.

Don’t get me wrong, for those who qualify it will certainly help. Depending on the income of an individual and their family size, it could save a borrower upwards of $50 or more a month. It also means the light at the end of the tunnel is 5 years closer. Of course, even Newtonian Physics applies to this. For every action there is an equal and opposite reaction. Earlier forgiveness could mean a higher tax bill because the amount forgiven is taxable.

Not a Solution

This is not a solution, it is a bandage. It doesn’t make college more affordable. It doesn’t cap maximum loan amounts. It doesn’t create underwriting standards. It doesn’t return bankruptcy or other consumer protections to federal student loans. It doesn’t address the private student loan debacle (you know, the loans that supposedly have underwriting standards that allow an 18 to 22 year old to rack up $100,000 in debt with no credit history, ropes in a relative as a co-signer, offers no flexible repayment terms, and is also exempt from discharge in bankruptcy? The real killer of the economy in my opinion). It doesn’t even apply to all federal student loans (Parent PLUS loans are not eligible)!  This is, at best, a baby step forward.

Making loan repayment affordable is good. Making Higher Education affordable without loans would be better.

Comments

  1. Anything less than making private student loans dischargeable in bankruptcy, the way they were WAY back in 2005, is just not enough.

    And why in the world would this only be available to a few borrowers? HEY — we helped some but not others and only some loans BUT WE FIXED EVERYTHING.

    I’m not even sure you NEED to go to college to see how this is overly advertised hype.

  2. Obama is cleverly giving the Republicans a chance to oppose the changes and thereby remind voters of their unwillingness to help student loan borrowers.

  3. Good post and thanks for the update Josh. Any update on the budget proposal to extend public service loan forgiveness from 10 years to 25 years. Thanks.

    • Joshua Cohen

      I haven’t heard anything about the budget proposals…yet.

    • Jim Clark

      Why is everyone silent on the outrageous interest rates charged by the banks that administer these loans. With interest rates on savings accounts at .05% or lower, how do you justify 7.8% student loans? Only by looking at political contributions from the banks to politicians.

      • Joshua Cohen

        Depends which loans. Federal interest rates are set by Congress. Private loans – well that’s the private lending industry, where 7.8% would be a steal! I’ve seen private loans at 14%. That’s ridiculous!!

  4. Tina

    So PAYE ONLY applies to Federal and not private student loans?

  5. All we need is a bill amending 11 USC 1328(a)(2).

    It currently says: “of the kind specified in section 507 (a)(8)(C) or in paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8) or (9) of section 523 (a)”

    Just cross out the “(8)” and student loans are dischargeable in Ch 13.

    • Joshua Cohen

      If only it were that simple. But why discriminate between those who file 13 and 7?

      • I think it would provide a good compromise to the lenders and fairness to the system to limit automatic discharge to Ch 13 filers.

        Let Ch 7 filers prove undue hardship (perhaps under an easier definition than Brunner). The rest of us can pay our DMI for 5 years and then be clear of the rest.

        Directing debtors to Ch 13 to eliminate student loans gives the lender the hope that income may improve during that time, thereby reducing some of the losses, and makes certain the debtor is serious about making a reasonable effort to repay. It reduces the “moral hazard” by putting some burdens on the debtor as well…a five year commitment to make timely trustee payments is nothing to sneeze at, though they would be very low payments for lower income debtors.

  6. A loan is always a loan, you should pay it. You are right. Why is that the government will not find way to make education affordable instead of promoting student loan affordable. I think that is the best solution of all.

    • Joshua Cohen

      It’s not that people should pay it – it’s that people CAN’T pay it. No one every comes in to my office asking to get out of their loan. They simply want an affordable payment. If they can’t afford their mortgage, they give up the house or get a modification. If they can’t afford their car, they voluntarily surrender it. If there is a deficiency from either of these two, they can file bankruptcy and be done. Not the same with education – it can’t be given back. Worse, some schools are so bad, there is no education in the first place. This isn’t an issue of fiscal irresponsibility on the part of the student. Many times its the school that creates the issue.

  7. Valerie

    Lip service and distraction. If Obama really wanted to help out with student loans he’d help repeal the student loan sections of the Patient Protection and Affordable Care Act. Graduates can’t consolidate for a competitive rate anymore, only a weighted average through government companies. No one talks about this.

    • Joshua Cohen

      Competitive interest rates are a red herring. People with 2% APR have just as much trouble paying $75k as those with 6.8% Besides, interest isn’t even a factor for some payment plans.

  8. Clearly, the rising issue with overwhelming student loans in America is troubling college students across the country. As a first year student, I am just now beginning to witness and feel the financial pressures that college brings. Us students find ourselves dealing with a very frustrating catch 22 of a situation; we are told our whole lives that in order to have a successful career and life, we must obtain a higher education. On the flip side, most students leaving college have tons and tons of debt piled up before they can even begin! Personally I directly relate this issue to the growing economical problems. Granted, federal student aid helps many of under priveleged students entering college to afford all the costs and resources needed for college. There has got to be some system or some kind of way to lessen the amount of debt students are facing when entering the work force. I believe it is our responsibility as Americans to find a way to make college more affordable and a more likely pathway for those of us who just simply cannot tale on the financial aspects of higher education.

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  1. […] loan attorney Joshua Cohen (@studentloanlaw) writes an excellent critique of the Obama administration’s new executive order to lower student loan payments. The order will extend eligibility for the Pay-As-You-Go (PAYE) […]