Obama's Loan-Debt Relief Might Not Reach the Neediest Borrowers

June 10, 2014

At a White House event on Monday, President Obama announced plans to expand the federal government’s most generous income-based student-loan-repayment program to an additional five million borrowers.

Yet if history is any guide, far fewer borrowers will actually enroll in the president’s Pay as You Earn program, which caps borrowers’ monthly payments at 10 percent of their income and provides loan forgiveness after 20 years.

Just over 2.2 million borrowers are now enrolled in income-based repayment plans, out of 17.5 million borrowers in repayment. Among the enrolled, 600,000 are in income-contingent repayment and 1.4 million are in income-based repayment. Some 190,000 are in the president’s signature Pay as You Earn plan, far fewer than the 1.6 million that the White House predicted would benefit from the program back in 2011.

In an effort to raise those numbers, the Education Department has begun promoting the programs aggressively. Last November the department announced that it would email some 3.5 million student-loan borrowers to remind them that they might be eligible for an income-based repayment plan. Two months later, the administration announced that it was working with Intuit to educate tax filers about their repayment options.

Those efforts have proved somewhat successful. In the six months from October 1, 2013, to March 31, 2014, the percentage of borrowers enrolled in the three income-based repayment plans jumped two percentage points, to 13 percent. Participation in Pay as You Earn more than tripled, to 190,000 borrowers, while participation in income-based repayment grew by 400,000 borrowers.

But the share of borrowers enrolled in those two plans remains stubbornly low. In October just three out of every 1,000 borrowers were participating in Pay as You Earn; by March it was 11 out of every 1,000. During that same period, enrollment in income-based repayment grew from 65 out of every 1,000 borrowers to 82.

Part of the reason for the low enrollment in Pay as You Earn is that the benefit is available only to borrowers with newer loans. In an executive order he signed on Monday, President Obama is now expanding the benefit to people with older loans—those who borrowed before October 2007 or who stopped borrowing by October 2011.

In a fact sheet issued on Monday, the White House said the expansion would allow a fourth-year teacher who graduated with $26,500 in debt in 2009 and who makes $39,000 a year to reduce her monthly loan payments by $126 a month over a standard repayment period, saving her more than $1,500 a year.

That’s a significant amount, but it fails to take into account that the hypothetical teacher could already be paying off her debt under income-based or income-contingent repayment, and that her debt will balloon due to accumulating interest.

Let’s assume that the teacher’s debt is all unsubsidized, making the interest rate 6.8 percent, and her standard monthly payment is $305. Under Pay as You Earn, she could lower her payments to $179 a month, according to the Education Department’s repayment estimator. That compares with $269 under income-based repayment, which caps payments at 15 percent of borrowers’ income, and $232 under income-contingent repayment.

But while she would pay less each month under Pay as You Earn, she would accumulate $4,000 more in interest than she would under the income-based plan. That might not matter to the teacher, who, as a public servant, could have any remaining debt forgiven after 10 years of repayment (a scenario the estimator doesn’t take into account), but it would matter to private-sector workers, who would end up paying more on their debt over time.

Teachers and Lawyers

For the lowest-income borrowers—those most likely to be struggling with student-loan debt—the difference in monthly payments between the current plans and Pay as You Earn will be negligible.

In fact, the biggest beneficiaries of the change are likely to be graduate- and professional-school alumni with large debt balances and low-paying public-service careers. Consider, for example, a public defender who graduated from a private law school in 2012 with $125,000 in debt (the average that year) and has an adjusted gross income of $55,000. He could reduce his payment from $469 a month under income-based repayment to $312 under Pay as You Earn, according to the repayment estimator, and have more than $175,000 in debt forgiven, compared with less than $49,000 under income-based repayment. Ultimately, he would pay back more than $150,000 less than he would in an income-based plan.

Under a 10-year standard repayment plan, that same borrower would owe $1,475 a month and ultimately pay back $43,000 more than he would under Pay as You Earn. And those comparisons assume the borrower wouldn’t qualify for loan forgiveness until he had made payments for 20 years; as a public servant, he would be eligible a decade sooner.

Higher-income borrowers with graduate- or professional-school debt could also qualify for significant amounts of loan forgiveness under the White House’s plan—a loophole that advocates have urged the president to close. They warn that the existing plan benefits borrowers who are capable of repaying their debt, and encourages graduate and professional schools to raise tuition, adding to their students' debt loads and burdening taxpayers.

In his budget for the 2015 fiscal year, Mr. Obama proposed capping loan forgiveness for public-sector employees at the aggregate loan limit for independent undergraduates and requiring private-sector employees with balances greater than that amount to pay for 25 years before receiving forgiveness.

To ensure that high-balance borrowers "pay an equitable share of their earnings as their income rises," the budget would also eliminate the program’s standard payment cap. But those changes haven’t been enacted by Congress, and they’re not included in the executive order that the president signed on Monday.