On June 9th, 2014 President Obama speaking to an auditorium full of college student announced that he would use the power of his pen and phone to help ensure hard working Americans had the opportunity to succeed. With one swipe of his pen he ordered the department of education to make available a new loan program that would cap federal student loan payments at just 10% of a borrowers income. This week the Department of Education has given borrowers a look at the new repayment plan, and the early consensus is that the new program will fall short of helping many at all.
Revised Pay As You Earn, or REPAY, as the Department of Education is calling it, is a far cry from the current programs, Income Based Repayment and Pay As You Earn, that already can cap a borrower’s payment at 10% of their income. The need for the REPAY program stems from the restrictions placed on PAYE and IBR that only “new” borrowers can choose those plans in existence that cap a borrower’s payments at 10% of income. Specifically, borrowers who had taken out loans prior to 2007 or have not taken out a federal loan after 2011 are not eligible for the more favorable repayment terms. The intent of the Presidents executive order was to expand the program advantages already offered by the federal government and to help families struggling with their loan repayments regardless of when they received federal financial aid. The problem with the proposed REPAY program is that is very different that the current repayment options available to more recent borrowers. There are two glaring changes proposed that will make the new REPAY program a bad deal for borrower’s if it is kept in its current form.
The Return of the Marriage Penalty
The first Income Driven Repayment program was created in 1993 and a major reason why the program was not well received with the inclusion of a spouses income into the required payments. One of the biggest risk with selecting an Income Based Repayment Plan is that borrowers may pay more interest and more in total in an IDR plan. Borrowers in IDR will pay more to their student loans when a borrower’s income and payments starts off low, in many cases less than the interest that is being charged each year, causing the total outstanding debt to increase. Then at a later date when then borrower’s income increases the borrower ends up having to pay off the higher balance later. While this risk exists with all Income Driven Repayment plans, the ability for a borrower to assess this risk is greatly increased when a borrower must include a spouses income in their repayment calculation. The biggest problem with including a spouses income is that most borrower’s choose their repayment plan after graduating and are not married, thus they will only consider their income when determining the value of IDR as a repayment option. The inclusion of a future spouses unknown income make it impossible for a borrower to make an informed decision about with repayment plan they should choose. Furthermore, later including a spouses income into their repayment plan is akin to a bait and switch as the borrower would elect the program under one assumption, only to a totally different circumstance later. If this were a financial product offered by a private company, the SEC would be investigating the firm for fraud.
Looking further into the return of the marriage penalty, a borrower who is repaying their loans will have a difficult decision to make when they consider getting married. The department of education should not look to disincentive the union of those who love one another. Just this past month we saw the struggle of many LBGT come to an end when the Supreme Court determined marriage to be a right for all. An institution that carries so much social significance should not be one that is undermined by student loans. The inclusion of the marriage penalty will make the decision to marry be one that could cost 10s even 100s of thousands of dollars in student loan payments.
Punishment of the Most Indebted
The proposed REPAY program also brings with it a new feature that will punish the most indebted graduates. According to Newamerica, graduate students make up only 14% of college students, however they account for 40% of the student loans issued. It is not uncommon to find those with advanced degrees beginning their careers with more than $200,000 in student debt. In comparison, most undergraduates are limited to $31,000 in federal loans. The proposed changes to REPAY would make borrower who have gone to graduate school pay a percent of their income for 25% longer than those who only had debt from their undergraduate degree. If the intent of the President was to make repaying loans easier for those with excessive debt compared to their income easier, how does it then make sense for the department of education to punish those with the most amount of debt? Take for instance a recent medical school graduate with $350,000 in federal student loans that is starting residency to become a pediatrician. According to Salaries.com the median salary for a pediatrician is $181,048, with 25% of pediatricians earning less than $157,977 and she wont even earn those figures for 3 years. Why would a professional in such a predicament not receive the same treatment as an undergraduate borrower with $35,000 in student loans making only $18,000 a year? As a society we rely on those with advanced degrees for many important aspects of our lives. They give us legal advice, medical advice, and financial advice. It seems logical that it would be in everyone’s interest that the advice provided by a professional such as a doctor be driven the their Hippocratic oath, not the oath they made to the federal government to pay for their education.
So what can you do? At this stage these are only proposed rule changes that are not yet established, and these are only a few of the changes that are being proposed. The Department of Education has released the proposed changes for public comment. If you agree that the above changes would make the new repayment program a bad deal for borrowers, let them know by clicking here and leaving a comment.