If President Barack Obama is calling 2014 his year of action, then this must be student loan summer. And the president has just checked one college debt initiative off his to-do list.
In an effort to relieve some of the financial burden on borrowers buried in debt, the president on Monday used his executive authority to make more people eligible for an existing program that caps student loan repayments at 10 percent of an individual’s monthly discretionary income.
Moreover, after 20 years in the Pay As You Earn program, any remaining debt is forgiven, although that balance is subject to federal income tax for most borrowers.
Under the plan, the administration expanded a 2010 law that capped monthly repayments, applying it to those who got direct student loans from the U.S. Department of Education before October 2007 and took out at least one more loan after September 2011. Federal loans to parents do not qualify.
The law will not go into effect until the end of 2015, giving the Department of Education time to work out the details, including the significant issue of finding the revenue to offset the student loan writeoffs.
While the Pay As You Earn directive is a positive development and will particularly help graduates in public service jobs, it may not come close to help the 5 million or so borrowers the administration believes will qualify for the program, said Mark Kantrowitz, senior vice president and publisher of Edvisors.com and a nationally recognized college financing expert.
“We’re mostly going to see a migration” to Pay As You Earn from the other main federal-income-based repayment program that is available to all borrowers, he said. At best, Kantrowitz expects several hundred thousand borrowers to enroll.
If your son or daughter is contemplating signing up for the expanded repayment program, study the details carefully and consult your loan servicing company or the Department of Education.
“Increased payments for financial success, thinking through the effects of the plan when considering marriage, remembering to deal with the required paperwork, it’s a lot to deal with,” said Mary Kay Foss, a certified public accountant in Danville, Calif., who has studied the repayment plan.
“If someone marries an individual with large student loans, not only are they taking on the debt, but the former student’s payments may go up because of increased household income,” Foss said. “It might be a positive with a nonworking spouse or starting a family, but it could be a negative.”
In addition to the loan repayment cap, the administration intends to renegotiate contracts with private student loan lenders to increase incentives offered to borrowers to pay off their loans on time. The Education Department said it will work with firms such as Kansas City-based H&R Block to inform borrowers of repayment options and tax credits for paying college tuition.
President Obama also has been challenging Congress to pass legislation that would let student loan borrowers refinance their balances at lower interest rates. That reform measure was blocked in the Senate on Wednesday, but it may resurface.
Finally, there’s proposed legislation, called the Smarter Borrowing Act, that would improve student loan counseling aimed at teaching graduates about repayment options before they leave campus. Introduced in 2013, the bill aims to lower student loan default rates.
Unfortunately, Kantrowitz said, none of these initiatives address what he sees as the real problem — the amount of debt, not the cost of the debt.
Kantrowitz noted that federal and state support of higher education has not kept up with increases in college costs, creating a heavier burden on students and their families to pay for school at a time when many household incomes remain stagnant.
“If Congress wants to address the growing debt burden, they need to increase funding” for grants and other assistance packages with no repayment obligations, Kantrowitz said.
In the meantime, many student borrowers past and present will just have to sweat it out.