President, Democrats Propose Student Loan Repayment Options
June 16th, 2014
Last week, the White House and Senate Democrats made a push to provide relief to varying cohorts of former students with student loan debt. On June 9, President Obama signed an Executive Order aimed at potentially easing student loan repayment for millions of past borrowers. The order directs the Department of Education to expand its most generous income-based loan repayment program, known as Pay As You Earn (PAYE), which caps the amount a borrower must pay at 10 percent of borrower income, and forgives any unpaid amount after 20 years. Currently the PAYE program is limited to those who took out their first loan after September 30, 2007, and continued borrowing after September 30, 2011, although it was already set to become an option for all new borrowers on July 1. The President’s action would expand PAYE as an option for all earlier borrowers, and is expected to increase the number eligible by 5 million former students. The Department will have to engage in a regulatory process that means that this new option will be available late next year at the earliest. The Executive Order would also require the Department of Education to renegotiate debt collection contracts to provide greater incentives for student loan servicers to keep borrowers from defaulting on their loans, and direct the Department to better publicize the availability of the PAYE option.
Meanwhile, on June 11, Senate Democrats’ attempt to pass a student loan refinancing bill, S. 2432, the Bank on Students Emergency Loan Refinancing Act, was thwarted by Senate Republicans. Championed by Sen. Elizabeth Warren (D-MA), the legislation would allow federal and private student loan borrowers to refinance their student loans at today’s lower interest rates for new federal student loan borrowers. The cost to the Treasury would be paid for by implementing “the Buffett Rule,” which is a surtax on taxpayers earning in excess of $1 million per year.
While the student loan refinancing legislation is highly unlikely to progress beyond the Senate this year, the President’s action will take full effect in December, 2015. However, refinancing legislation, which is part of the Democrats’ “Fair Shot” agenda for the 2014 mid-term elections, may well become a theme in upcoming Higher Education Act (HEA) reauthorization legislation. In that event, paying for the high cost (expected to be about $58 billion over 10 years) would likely come either partially or fully from cuts or changes to other higher education programs. In a time of austere budgets for education, such offsets could become particularly problematic for larger programs, such as Pell Grants.