Student loan holders still salving the wounds of tuition increases and dwindling financial aid nationwide may soon find fewer reasons to fret about financing their education.
To ease student loan burdens, President Barack Obama announced yesterday a broadening of the income-based loan repayment program. Graduates who participate in a new “Pay as You Earn” option will be able to pay 10 percent of their discretionary income until the balance of their student debt is forgiven after 20 years. Though Congress passed similar measures last year that were set to take effect in 2014, the new option will be available starting next year.
Under the current income-based repayment system — in which 450,000 borrowers nationwide are enrolled — graduates pay 15 percent of their discretionary income toward their loans, and forgiveness is only an option after 25 years. The 15-percent cap has been in place since 2007, but Obama wrote in an Oct. 25 White House press release that student borrowers need “even more immediate relief.”
“In a global economy, putting a college education within reach for every American has never been more important,” Obama wrote. “But it’s also never been more expensive.”
According to Pamela Fowler, executive director of the University’s Office of Financial Aid, 2,037 in-state undergraduate students had an average federal debt of $20,183 during 2009-2010, with an average monthly repayment of $236.42 under the standard 10-year repayment plan. Meanwhile, 705 out-of-state students had an average federal debt of $22,399 during the same time period for an average monthly repayment of $257.78.
Fowler wrote in an e-mail interview that the University does not currently have any students up for loan forgiveness, so she could not determine how many University students take advantage of the income-based repayment option. However, many students do not consider it “until they are near or at the point of default,” Fowler wrote.
Income-based repayment helps graduates “keep monthly payments low during years when their gross pay is low and other expenses high,” Fowler wrote. She added that it prevents many graduates from defaulting on their student loans and protects their credit history.
Fowler wrote in an e-mail interview that she thinks the 20-year forgiveness period is much better than the original 25 years. She added that she hopes the initiatives will draw attention to the underutilized income-based repayment program.
“After 20 years, many students will be faced with sending their children to college,” Fowler wrote. “Having both of those financial priorities at the same time is probably not a good thing.”
In a conference call with reporters on Tuesday, U.S. Secretary of Education Arne Duncan and Melody Barnes, director of the Domestic Policy Council, reiterated Obama’s call of urgency as students are on the cusp of entering an increasingly global and competitive economy once they graduate.
“Because we know the frustration of crushing loan burdens, we believed that we had to act today,” Barnes said. “This president knows that getting a postsecondary education is important for economic security and to make sure students are ready and available for the jobs of tomorrow.”
Barnes added that reducing the cap could lower monthly payments by hundreds of dollars a month, easing the debt of graduates who enter the market in low-paying fields.
Barnes and Duncan also stressed that the cost of higher education is a deterrent for many young people, and they hope Obama’s efforts will change that.
“College continues to be a great, great investment,” Duncan said during the call. “We have to educate our way to a better economy and have to continue to make sure that college is accessible and affordable, particularly for young people that don’t have a lot of economic support.”
As tuition rates rise nationwide — including at the University, which raised tuition by 6.7 percent for in-state students and 4.9 percent for out-of-state students this year — the importance of loan repayment measures like Obama’s recent initiative has also risen, said Mark Kantrowitz, founder and publisher of FinAid.org.
Kantrowitz said the announcement was “good news” amid a spate of cuts to financial aid legislation like the elimination of the in-school interest subsidy on federal loans in August. However, the cap is only a small measure, and borrowers who have already taken out student loans will continue to bear the full burden of their debts, he said.
Barnes acknowledged in the conference call that the option was not significant in scale and would not provide the boost to the economy Obama was hoping for, though it would help somewhat.
“The steps we’re taking today are not a substitute for the bold action we need to create jobs and grow the economy,” she said. “But they will make a difference.”