It used to be that higher education was a sure ticket to a secure future and even prosperity. For millions of Americans, however, the cost of college and graduate school can mean decades of financial hardship. With a new proposal, the Obama administration hopes to provide some relief, but the magnitude of that relief is far from clear.
Today, the president announced his "Pay As You Earn" proposal, which would allow federal student loan borrowers to cap their loan payments at 10 percent of discretionary income as early as next year. The plan would also forgive debt balances after 20 years of payments. This is a substantial change from current law, under which the cap is 15 percent, and loan balances can be forgiven after 25 years. The administration estimates that this change would affect 1.6 million students. The new proposal would also allow an estimated 6 million students and recent graduates to consolidate their loans and reduce their interest rates starting in January.
In a speech at the University of Colorado-Denver today announcing the initiative, the president framed the proposal as not just helping struggling individual borrowers, but helping America compete in a global economy: "College isn't just one of the best investments you can make in your future; it's one of the best investments America can make in our future."
But the administration has also highlighted the individual-level relief that Pay As You Earn might provide. "For many who struggle to manage their student loan debt...these proposed changes could reduce their payments by hundreds of dollars every month," said Melody Barnes, director of the president's Domestic Policy Council, in a call with reporters on Tuesday. "The weight of this debt is preventing graduates all over the country from achieving their dreams," she later added.
The new student loan initiative is one of several proposals that the White House is packaging under the slogan "We Can't Wait"—a nod to a divided Congress that has stalled the president's American Jobs Act. By enacting these changes through executive order, the president is able to institute them more quickly and without partisan wrangling. Other "We Can't Wait" pieces include a plan to make mortgage refinancing available to more troubled homeowners, as well as an initiative to help veterans get jobs.
And while the administration is trumpeting "We Can't Wait" as loudly as it can, it is also being careful to manage expectations. The administration has reiterated several times that its "We Can't Wait" initiatives are not intended to be a substitute for large-scale jobs legislation.
But even student loan debt can seem like an insurmountable problem to tackle. The nation's cumulative student loan debt has surpassed the nation's credit card debt, and many recent graduates are struggling to make ends meet. The Institute for Higher Education Policy also reported earlier this year that, of the 1.8 million borrowers who entered repayment in 2005, 37 percent repaid their loans without postponement or delinquency, while a larger segment, 41 percent, either became delinquent or eventually defaulted.
Rising tuition prices may only worsen the problem. Though public institutions remain far cheaper than private colleges and universities, that gap is starting to shrink. "Over the past decade, tuition and fees at public colleges have increased by an average of 5.6 percent per year above the rate of general inflation," Raj Date, special adviser to the secretary of the treasury for the Consumer Financial Protection Bureau, told an audience in Minneapolis today. The College Board reported this week that for five consecutive years, the percentage increase in average tuition and fees at public four-year colleges has exceeded the corresponding increase at private institutions.
The eventual success of the Pay As You Earn program is difficult to predict, and would be limited for many already saddled with debt. Only current students would be eligible for the new income-based repayment caps. And the current income-based repayment program has attracted only a small segment of borrowers. Barnes says that just 450,000 of the nation's 36 million borrowers are taking advantage of the program. According to the administration, one key reason for this gap is that many borrowers simply are not aware that income-based repayment is available.
"I think having the president remind folks that it's something that is available to them, to students in need, is a major step. And we're going to continue to press the point around the country. Our hope is to do this at a grass-roots level," says Justin Hamilton, press secretary for Secretary of Education Arne Duncan.
While advocacy might entice more people to use income-based repayment, other hurdles prevent them from negotiating newrepayment plans on their loans. "There's a whole range of problems: slow processing, misinformation, [loan servicers] steering people away from [income-based repayment] to other options," says Deanne Loonin, director of the National Consumer Law Center's Student Loan Borrower Assistance Project. She says that borrowers in default face the biggest difficulties in changing their repayment terms. "We are encouraged that [the White House is] focusing on the information piece, but that's not enough," she says.