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News

Obama Seeks Better Terms for Low-Income Borrowers After College

By Paul Basken January 25, 2010
Washington

The Obama administration on Monday proposed increasing government support for college students who take low-paying jobs after they graduate, by charging them less for their loans and forgiving the loans earlier.

Administration officials announced the plan as part of a package of proposals to help “middle class” families that President Obama expects to outline next week in his federal budget recommendation for the 2011 fiscal year.

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The Obama administration on Monday proposed increasing government support for college students who take low-paying jobs after they graduate, by charging them less for their loans and forgiving the loans earlier.

Administration officials announced the plan as part of a package of proposals to help “middle class” families that President Obama expects to outline next week in his federal budget recommendation for the 2011 fiscal year.

The president’s new student-loan plan would sweeten a program known as income-based repayment, created by Congress in 2007, in which borrowers with a federally subsidized loan are required to make payments on the loan each year that total no more than 15 percent of their discretionary income. The new proposal could cut that maximum payment to 10 percent, and could allow those loans to be fully forgiven after 20 years of payments rather than the current 25 years.

“It’s going to provide meaningful repayment relief for people who are struggling,” said Mark Kantrowitz, publisher of FinAid, a Web site that provides advice on financial aid.

Administration officials said they would place no price estimates on their proposals before Mr. Obama issues his overall 2011 federal budget next week. Mr. Kantrowitz said he estimated that the reduced annual loan payments and the quicker timetable for loan forgiveness would cost the government about $1-billion over five years.

The president is making the proposal as he continues to wait for Congress to act on a far larger commitment to students that he made upon taking office a year ago. The administration asked Congress to eliminate the federal system that provides subsidies to private student-loan companies, saving the federal government an estimated $87-billion over 10 years. The president proposed devoting most of that money to increasing grants and lowering interest rates for students.

Senate Delays

The House of Representatives has passed a version of that bill, but Senate Democrats have postponed action while concentrating on health-care legislation. The Senate can use a process known as reconciliation to pass a measure with just a 51-vote simple majority if the bill reduces overall federal spending, but reconciliation can be used only once a session and Democratic leaders want to see if it will be necessary for the health-care overhaul before using it on the student-aid bill.

Mr. Obama’s vice president, Joseph R. Biden Jr., outlined the new plan on Monday in his role as chairman of the White House Task Force on Middle Class Families. Other proposals in the plan, which Mr. Obama also plans to detail on Wednesday in his State of the Union address to Congress, include new tax credits for child care and a new system to help workers save automatically for retirement.

Mr. Biden said that such benefits for middle-class families were essential to shoring up political support for more costly benefits for lower-income families. “Pell Grants don’t hang around a long time,” he said, “unless you make sure those folks making $80,000 or $100,000 are able to send their kids to school too.”

Under the middle-class plan’s student-loan proposal, the proposed limit on borrowers’ annual payments would mean the monthly payment for a single borrower who earned $30,000 per year and who owed $20,000 in loans would fall from $228 a month to $115 a month, Mr. Biden said.

The federal government now provides more than $85-billion a year in subsidized student loans. In addition to limiting the amount that low-income borrowers must repay on those loans, the changes approved by Congress in 2007 allow for loans to be forgiven entirely after 10 years of payments by workers in certain public-service jobs, such as teachers, police officers, and health-care workers.

New Cost Estimates

Meanwhile, the continued delays in Congress on legislation to enact President Obama’s plan to eliminate the bank-based federal student-loan program could soon cost students and colleges billions of dollars they were hoping to receive. The Congressional Budget Office, a nonpartisan entity, is scheduled to issue its annual assessment of the costs of legislation on Tuesday, and it probably will reduce the $87-billion estimate it placed on the bill last year.

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The reduction is likely because of factors that include the move over the past year by hundreds of colleges into the Education Department’s direct-loan program, through which students receive loans without the use of private banks. Senate Democrats could put in place the new budget-office estimate immediately, sharply reducing the savings available to put into student-loan and grant programs, or wait a few more weeks until Congress approves its annual budget resolution.

Congress also is considering other steps that might help students, including one bill that would make clear that any loan payments forgiven by the federal government are not treated as income.

That was an oversight in the current debt-forgiveness measure, potentially subjecting low-income borrowers to huge tax debts the day their federal loans were fully absolved, said Richard T. Williams, a higher-education lobbyist at the U.S. Public Interest Research Group, a consumer-advocacy organization.

The administration’s proposal to cut maximum payments from 15 percent of discretionary income to 10 percent also could leave some borrowers paying more money in the long term because they would be paying back their loans for a longer period, Mr. Kantrowitz said. But such instances would probably be rare, he said, given that current law already caps the repayment term at 25 years for low-income borrowers.

We welcome your thoughts and questions about this article. Please email the editors or submit a letter for publication.
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Paul Basken Bio
About the Author
Paul Basken
Paul Basken was a government policy and science reporter with The Chronicle of Higher Education, where he won an annual National Press Club award for exclusives.
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