A new report from the independent think tank the New America Foundation released Tuesday provides a sobering analysis of a much-touted Obama administration plan to offer repayment of student loans adjusted to one's income. The report found that the debt-relief plan actually offers the "unnecessary" help to higher-income students, while students making less than $25,000 a year will only see their payments shrink "by as little as $5 and not more than $20" a month.
The problem, according to report authors Jason Delisle and Alex Holt, is that this plan is a bigger boon to higher-income graduates that take on large loads of debt. The program "would give over four times as much aid to law school graduates with starting annual salaries of $70,000 who go on to earn much more over their careers" as low-income students, the authors write. In fact, there is no incremental penalty for borrowing more than $60,000 in loans even with a six-figure income, the report's authors calculate.
"I would even argue that if you've got one graduate degree and you borrowed a lot to pay for it, your second graduate degree will be free," Delisle told Raw Story. "It gets rid of any incentive for law schools to bring down their cost."
The income-based repayment program was passed in 2007 and originally designed for borrowers entering public-service careers like teaching, allowing them to cap monthly payments at 15 percent of their income and eventually qualify for loan forgiveness after making payments for 25 years. In 2010, Congress expanded the program as part of a package of higher education legislative changes. The new version allows anyone to cap payments at 10 percent of his or her discretionary income and qualify for full loan forgiveness after making payments for 20 years.
The result, according to the report, is "windfall benefits" to high-income, high debt borrowers, most of whom would be graduate school borrowers. By running a series of scenarios, the authors found someone making as much as $243,360 and carrying a loan balance of $208,259 could qualify for complete loan forgiveness after 20.
"You just made this program extremely attractive for graduate students," Holt told Raw Story. "I would question the wisdom of giving someone who, in their last years of repayment, is making $250,000 to give them $100,000 forgiven, when the maximum in Pell an undergrad can get is is around $23,000 -- and those are the lowest of the low income. We should ask ourselves, is this the best allocation of resources?"
Meanwhile, because the changes to the program lowers the cap from 15 to 10 percent of one's income, someone making just $30,000 a year would see a very small change in his or her payments under the new program. "When you get down to the monthly payments, you're only saving like 5 bucks," Delisle said.
The changes to the program were originally intended to be implemented in 2014, but the Obama administration has pushed for them to be implemented earlier, with those who began taking loans out in 2008 and those who take out new loans in 2012 among the first who could qualify, though final regulations have yet to be implemented. The Obama campaign has also aggressively promoted the new plan as a major component of the campaign.
President Barack Obama advertised the changes to the program during a speech at the University of Las Vagas in June, "For those of you who are still in school, you're about to graduate, as long as you make your monthly payments on time -- all right, so pay your bills on time -- we will cap the payments you have to make on your student loans at 10 percent of your discretionary income once you graduate."
Department of Education spokesperson Justin Hamilton said in a statement to the New York Times that income-based repayment “isn’t necessarily right for everyone, but it can be an incredibly helpful resource for people struggling to manage their student loan debt.”
However, the authors said, "There are easy ways to fix this."
The report recommends that the Department of Education essentially keep the new program for lower-income earners but force high-debt, high-earner students to stick to the old version of the program. The department can keep the 10 percent level, but limit it to incomes at or below 300 percent of the poverty level, the report said. Those with incomes above that, New America argues, should pay the old income-based repayment level of 15 percent. They also recommend that borrowers who started with initial loan debts of more than $40,000 only qualify for forgiveness after 25 years.
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