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.
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.
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.
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.
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.