With the typical four-year college graduate accumulating more than $20,000 in loans, the Obama administration is banking on a new initiative that is a reboot of an existing but little-known concept – income-based loan repayment.
While complex in execution, the idea has a simple premise: Students repay their loans based only on how much they earn. Since payments are pegged to income, borrowers would have the flexibility to take lower-paying public service jobs without excessive debt burden.
“This is a fantastic program for students who want to go into lower-paying careers or are just having a hard time,” said Rich Williams, higher education advocate at US PIRG in Washington, D.C., a consumer and public interest group. If approved, the plan could have a “profound” effect on students, he told Diverse.
With jobs scarce for recent graduates in a down economy, students could have their monthly loan payments capped at 10 percent of their discretionary income — defined as the earnings that exceed the poverty level. Any remaining debt would be forgiven after 20 years.
The president’s proposal “could not come at a better time, as the weak economy and high unemployment are making it harder than ever for people to make monthly payments on their student loans,” said Lauren Asher, president of The Institute for College Access and Success (TICAS).
President Barack Obama unveiled his initiative in the State of the Union address, and it came originally from a recommendation from a middle-class task force chaired by Vice President Joe Biden.
Despite the attention the plan is receiving, the concept is not new. In fact, the federal government already has two income-based repayment initiatives, although both have drawn only limited interest so far:
- The Income Contingent Repayment program is available only to borrowers in the government-funded Direct Loan program. Monthly payments are based on the borrower’s income, family size and loan principal. But the program only reaches about 3 percent of students, says Mark Kantrowitz, publisher of finaid.org, a financial aid Web site.
- The government also has the Income-Based Repayment program, which caps loan repayments at 15 percent of income with full forgiveness of principal after 25 years. Created by the 2007 College Cost Reduction Act, the program just took effect last July.
So why would the government introduce a new initiative?
The existing initiatives “are good programs,” Kantrowitz says, “but the main limitation is that they aren’t providing enough relief.”
By providing more generous benefits — and touting them in a nationally televised speech — Kantrowitz says the plan could significantly increase participation in the program. Up to 25 percent of borrowers likely could benefit from the initiative, should they enroll.
“It improves on the current policies,” he added.
The program is particularly geared to those with large loans but dreams of careers in public service. “If you get a law degree and want to be a public defender earning $40,000 a year, income-based repayment is intended for you,” Kantrowitz says.
Students would have the flexibility to pay off their loans more rapidly as their income rises.
An analysis by TICAS’ Project on Student Debt illustrates how the Obama initiative would improve on existing law. A single person earning $30,000 a year and owing $33,000 in student loans would pay $110 a month under the Obama proposal, since the individual must only pay 10 percent of discretionary income.
The same graduate would pay $170 a month under the Income-Based Repayment program and $380 a month under a standard 10-year loan repayment plan.
“We strongly support this proposal as a way to make the program even more helpful to responsible borrowers,” Asher said. “This is a well-targeted and well-timed change that would help people who are struggling to stay afloat financially.”
Another advantage is that it may help borrowers avoid default if they cannot pay due to a job loss or an inability to find work. The plan helps borrowers “avoid default and pay down their debt in a manageable way.”
The plan requires approval from Congress, where one prominent leader already has endorsed the change. The change will “make repaying student loans more affordable,” said Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee. Miller is a past sponsor of income-based repayment legislation.
While congressional attention is important, the publicity from the State of the Union address also is prompting greater interest, according to Williams. Some loan officers and college aid offices publicize the existing income-based repayment programs, but the outreach effort can vary from college to college and lender to lender.
“A lot of students are not aware that the option is out there,” Williams told Diverse. “More students can and should take advantage of this.”
