Student Loans Update

Image Credit: Lava Lavanda on unsplash.com

Last August, President Joe Biden issued an executive order to forgive $10,000 in student loan debt (and $20,000 for Pell Grant recipients) for borrowers earning $125,000 or less (and couples earning $250,000 or less). Those were not, however, the only changes to the federal student loan program that Biden announced. And some of these other changes—in particular, modifications to the way that payments owed are calculated—could substantially lower the cost of education for millions of Americans.

Such modifications include the following measures:

1. Reduce the maximum payment on undergraduate loans from 10 percent to five percent of discretionary income.
2. Change the definition of “discretionary income” from income above 150 percent of the poverty line to income above 225 percent of the poverty line.
3. Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less (this mainly benefits community college students).
4. Cover the borrower’s unpaid monthly interest, so that no borrower’s loan balance grows if they make their monthly payments—even if, because their income is less than 225 percent of the poverty line, the amount owed is zero.

These proposals would amend the terms of the Revised Pay As You Earn program, eliminating loan-repayment requirements if the borrower earns less than about $30,600 annually (or less than $62,400 annually for a family of four).

This formula change is significant. Under current regulations, a single borrower who attended a four-year college and now earns $60,600 a year must pay $322.75 a month, or nearly $3,875 a year (that’s 10 percent of all income above 150 percent of the poverty level, an amount that currently works out to $21,870). Under Biden’s proposal, the payment required would fall to $125 a month, or $1,500 a year (five percent of all income above $30,600).

This decrease in monthly payments will go a long way toward assisting those who have low-paying jobs, including, unfortunately, far too many in the nonprofit sector. Indeed, the effects of student debt burdens are broadly felt across US society and can impact people’s lives for decades. For example, the US Department of Education has determined that nearly 20 percent of Americans who have student loan debt are 50 years old or older. Meanwhile, the typical Black borrower who started college in the 1995-96 school year still owed 95 percent of their original student debt 20 years later.

 

Many Debt Traps Remain

While the proposed federal rules are an improvement, many debt traps remain. For one, the “five percent” payment rule only applies to undergraduate education; the maximum payment on graduate-school loans remains 10 percent of discretionary income. If you borrow for both graduate and undergraduate school, your payment level would fall somewhere between five and 10 percent depending on how much was borrowed at each education level. If you were in default before the COVID pause, your income-based repayment plans will be higher.

Additionally, the new rule does not address the egregious method used for charging interest on standard federal school loans. Federal-loan interest rates are established by Congress, based on the 10-year Treasury note plus a fixed amount. They cannot be negotiated or refinanced, are not influenced by a borrower’s credit score, and compound daily, like credit card debt, making federal schools loans the most expensive financing option. As a result, people often end up paying double and triple what they borrowed.

What’s more, missed or partial payments not only add interest, resulting in a loan that is much more expensive than the amount initially borrowed; they also lower borrowers’ credit scores, limiting their ability, for example, to buy a house, even if their earnings increase.

As a point of comparison, the Canadian federal government, which froze interest on its student loans during COVID, has decided to make all student loans “permanently interest-free, including those currently being repaid, beginning on April 1, 2023.” Eliminating interest payments—such that borrowers are responsible for making payments on only the principal of what they borrowed—would vastly simplify what is today a dizzying assortment of repayment plans. Unfortunately, such a measure remains far from the agendas of policymakers in Washington.

 

What Comes Next

A 30-day public comment period on the amended REPAYE ended February 10, 2023. Unfortunately, comments on the Notice of Proposed Rulemaking were apparently taken over by an organized right-wing response. The vast majority of the approximately 5,000 comments posted through January 25 repeat many of the exact same paragraphs. Of a random sampling of 100 comments, only eight appear to have been submitted by borrowers with lived experience of burdensome school debt. All other comments repeated the claim that the cuts “would also contribute to the skyrocketing cost of college.” Other common comments included statements like, “Canceling student loans disproportionately benefits the wealthy as 56 percent of student loan debt is held by households whose borrowers earned graduate degrees.”

Social workers with master’s degrees would strongly disagree; they are not wealthy.

Will the stream of comments torpedo the proposal? Hopefully, the US Department of Education will hold its ground on proposed changes in the face of what are nearly identical negative posts.

Another path to addressing the cost of college is to increase federal grant support. Recently, Congress voted to increase the maximum Pell Grant for current and future students by a modest $500 to $7,395 in the fiscal-year 2023 federal spending bill that was passed into law last December—providing additional financial aid to college students from low- and middle-income families.

Meanwhile, the current pause in interest and required student loan payments has been extended while litigation continues in the US Supreme Court regarding Biden’s executive order for debt forgiveness. The pause will end 60 days after litigation is resolved, or on August 30, 2023, whichever is earlier.

While Biden’s proposed student debt forgiveness and the REPAYE program’s reduction in required payments are significant, making higher education affordable for low- and middle-income Americans requires altering the loan structure itself. Absent a shift to free public higher education, a sustainable student loan structure must permanently change how interest accrues on student loan debt. The US Department of Education could eliminate interest—as Canada has committed to doing—or, minimally, adopt a formula that limits compounding interest. Only in this manner will people of different income levels be able to repay their school loans—a vital step to making education affordable for all. However, such measures, for now, remain off the table.

The alternative to taking such measures, sadly, is playing out. Higher education is becoming a luxury good—accessible to students from families of means, but not the US majority. Such a trend, if it continues, will gravely harm the nation’s ability to provide the education that all people need to thrive economically. Even worse, the federal government’s failure to boldly change student loans will further institutionalize the nation’s growing racial and class divides.