President Obama announced new executive actions last week to address rising student loan debt burdens.
The proposed changes to income-based repayment received the most attention. The current Pay As You Earn plan has the most favorable terms for borrowers, but is only available to new borrowers (meaning borrowers taking out loans as of July 2014) and a limited number of borrowers with older loans. Under the Pay as You Earn plan, borrowers are required to pay 10% of disposable income toward federal student loans compared to 15% under “regular” income-based repayment. And Pay as You Earn borrowers can obtain loan forgiveness after 20 years compared to 25 years under “regular” income based repayment. In the announcement last week, President Obama proposed to extend the more favorable Pay as You Earn terms to all borrowers with older loans.
The President’s announcement does not include any changes to the way income-based repayment works. Congress could make those types of changes. In the meantime, the changes announced last week are about the President taking action without having to wait for Congress. This means that the mechanics of income-based repayment, including eligibility criteria, will remain the same.
Most important, borrowers need to understand that President Obama is PROPOSING to extend the more favorable terms to more borrowers. This will not happen overnight. It will only happen if the Department of Education successfully amends the regulations. The timing is not clear. President Obama said that his goal is to make the new plan available to all borrowers by December 2015.
In the meantime, borrowers that do not qualify for the better income-based terms can still obtain affordable repayment plans under “regular” income-based repayment. You should contact your loan servicer to discuss these options.
President Obama also announced that he is planning to strengthen incentives for loan contractors to serve students well. The Administration did not give much detail about what this means other than the President’s statement that the Department of Education will be renegotiating the contracts with the current servicers.
As we discuss in this new policy brief on loan servicing, we need to know a lot more about the government’s student loan servicing plans. When they say they are going to renegotiate the contracts, does that mean they are going to wait to renew the contracts? Or have they already renewed the contracts and are now renegotiating? How will the new “stronger” incentives differ from the current performance metrics? And is the Department seeking input from borrowers and their advocates as part of this process? We asked many of these questions in our May 2014 letter to Secretary Duncan, but we haven’t heard back yet.
We are very concerned about the secrecy surrounding the servicing negotiations. We fear that the Department of Education is moving toward a model in which it justifies withholding basic information about private servicers because of supposed proprietary contract arrangements. This may work well for Department employees seeking to avoid accountability, but it does not work best for borrowers and taxpayers.
The goal of the system should be to provide quality service to borrowers.
