Is President Obama’s “Pay as You Earn” student-loan-repayment plan a lifeline for struggling borrowers, a costly giveaway to graduate students, or a bit of both?
That question will be hanging over federal rule-making sessions this week, as negotiators begin hashing out a plan to extend the program to an estimated five million more borrowers.
The negotiations, which start on Tuesday, come amid growing concerns about the costs of Pay as You Earn, the most generous of the federal income-based repayment plans. Earlier this month, the president’s budget revealed that the expansion of the plan, coupled with increased participation in Pay as You Earn and other income-based repayment plans, would cost taxpayers more than $20-billion more than the administration originally thought.
That “budget re-estimate” has led to questions about the sustainability of Pay as You Earn, which caps borrowers’ monthly payments at 10 percent of their income and forgives their remaining debt after 20 years (or after 10, in the case of some public servants). Politico, the publication that first reported the revision, called it “the college-loan bombshell hidden in the budget” and an unprecedented “shortfall.”
Supporters of the program dispute that characterization. They point out that, even with the re-estimate, student-loan programs will still produce more than $100-billion in revenue over the next decade, according to the Congressional Budget Office. The revision, which is due to increases in the amount of debt that the administration expects to forgive, will just make student loans somewhat less profitable for the government.
“If the government is already poised to make billions over the next 10 years off the federal student-loan program, it should be making investments like these to make repayment more consumer-friendly for borrowers,” argued Jennifer C. Wang, policy director for Young Invincibles, an advocacy group.
Yet even President Obama, the program’s creator, concedes that Pay as You Earn could be better aimed at needier borrowers. In his last two budgets, he has proposed changes that would scale back the benefits for higher-income borrowers while expanding them for lower-income ones.
Negotiators will consider his proposed tweaks, and others, during three days of rule-making talks this week. They’ll reconvene in March, and again in April, before voting on a final plan to expand and remake the program.
Rising Enrollments and Costs
Income-driven repayment plans have been around since the early 1990s, but relatively few borrowers knew about the programs, and even fewer opted in, until now.
Mr. Obama has sought to popularize the plans, promoting them as a solution to rising defaults. In 2010 he pitched Pay as You Earn in his State of the Union address, calling for lower monthly payments and quicker loan forgiveness for struggling borrowers. Congress enacted the proposal only two months later, but limited it to newer loans.
At the time, analysts with New America, a research organization formerly known as the New America Foundation, predicted that the biggest beneficiaries of the expansion would be individuals with graduate degrees and high debts. In a paper titled “Safety Net or Windfall,” they urged the administration to rein in the program, warning that it would make graduate students less cost-sensitive and would allow graduate schools to raise tuition on the taxpayers’ dime.
Two months later, the research division of Barclays, a British financial-services company, came out with a report arguing that the government had underestimated the cost of its new program by $235-billion. The report projected that, in the future, more than half of borrowers would participate in the program.
That hasn’t happened, despite the Education Department’s efforts to educate delinquent borrowers about income-based plans. But enrollment rates are rising. From April 2013 to September 2014, participation in Income Based Repayment, the largest of the plans, more than doubled, while enrollment in Pay as You Earn grew eightfold.
Last June, President Obama issued a presidential memorandum directing the Education Department to make the program available to borrowers with older loans.
In large part, the re-estimate is a testament to the success of the department’s outreach: As more borrowers have enrolled, the projected costs for outstanding loans have swelled by $15-billion. Expanding the program to borrowers with older loans, as negotiators have been charged with doing, would cost another $9-billion, assuming negotiators accept the president’s proposed “targeting.” If they don’t, the expansion could be even more expensive.
Jason Delisle, an author of the New America paper that first warned about the program’s costs, said the new estimate suggests that the government is “either giving away very generous loan forgiveness to grad students, or is making a lot of bad loans to people who can’t pay them back.”
Still, he worries that creating a new Pay as You Earn program, with different terms than the original plan, will further complicate a repayment system that nearly everyone agrees is too complicated already.
As he put it: “How many bells and whistles do you need before borrowers become utterly confused?”
Kelly Field is a senior reporter covering federal higher-education policy. Contact her at kelly.field@chronicle.com. Or follow her on Twitter @kfieldCHE.
