WASHINGTON – Six million more Americans could soon benefit from the government’s most generous student loan repayment plan as the Obama administration expands a program that has become a cornerstone of the president’s education policy.
The repayment program, known as Pay as You Earn or PAYE, caps borrowers’ monthly bills to 10 percent of their income and forgives the debt after 20 years of payment. So far, it’s only been available to people with especially low income relative to their debt and who took out their loans after 2007. But the administration is proposing to expand the program to anyone with an existing federal loan, regardless of their income.
The Education Department, which is accepting public comment on the proposal, expects to finalize the rule in late October. The changes will only apply to existing student debt since it would take an act of Congress to cover new loans.
But letting more people peg their monthly loan payments to a small share of their income will mean raising the cost of an already expensive program. A copy of the proposal published in the Federal Register said it will cost $15.3 billion over 10 years, nearly doubling the program’s current cost. Congressional Republicans have already criticized the rising pricetag of the administration’s loan repayment plans.
Still, the government’s flexible repayment plans are critical as student debt tops $1.3 trillion and people struggle to find jobs that pay enough to cover their monthly loan payments.
Income-driven plans are designed to prevent borrowers from defaulting on their loans, a problem faced by about 20 percent of people repaying college debt. Defaulting on student debt can severely damage a person’s credit rating, making it much harder to buy a car or a house.
“This proposal is an investment in our economy’s future that provides targeted benefits to even more borrowers, so they can stay current on their loans and furthers our commitment to lifting the burden of crushing student loan debt,” Education Secretary Arne Duncan said in a statement this week.
Under the new plan, anyone who borrowed for graduate school will have to make payments for 25 years, five years longer than everyone else, to have their remaining balance forgiven. That may quell concerns over grad students, who tend to borrow and earn more, taking advantage of the generous plan.
There are other changes being proposed that borrowers should also pay attention to.
People whose monthly payments fail to cover the interest on their debt will now have only half of the unpaid interest tacked onto their loan balance. And married borrowers can no longer lower their payments by excluding their spouse’s income, unless they are separated or victims of domestic abuse.
The revised plan may solve some complexities of the program, but the full universe of income-based repayment plans are as daunting as ever, said Jason Delisle, director of the federal education budget project at the New America Foundation, a think tank.
With the addition of the revised plan, there will now be five different student loan repayment plans tied to income.
“The administration has put much more effort in letting people into a system that it has made too generous, [rather] than trying to roll back the flaws of the program,” Delisle said.
Still, borrowers don’t have to create a spreadsheet to figure out which plan to select, Asher said, advising people to go to studentloans.gov to see which plan offers the lowest monthly payment.
“The addition of another plan just drives home the need for Congress to streamline repayment options into one improved income-driven plan and a limited menu of more traditional options that are easier for borrowers to understand,” she said. Congress is likely to take up the issue during the re-authorization of the Higher Education Act this year.
It’s taken a while for borrowers to warm up to income-driven repayment plans, mainly because so few have known of their existence. But as the White House redoubled its efforts to get the word out, there has been an increase in the number of people signing up. As of March, there are about 3.5 million people enrolled in the programs, a 60 percent increase over the prior year, according to the Education Department. Earlier this year, the government said increased use of all the administration’s income-based plans could cost $22 billion more than originally expected.
