Grad Students Could Win Big as Obama Slashes Debt Payments

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- Businessweek

Update – 2:45 p.m.: The official White House fact sheet is out and doesn’t provide many more details than the early reports cited in this story.

President Obama is set to address growing concerns over student debt and, according to multiple news organizations’ reports, he’s about to roll out a plan to help borrowers lower their monthly payments. The effort would see Obama use his executive authority to make more people eligible for an existing program that caps student loan bills at 10 percent of an individual’s monthly discretionary income. If those details hold true, the changes could be helpful to millions of borrowers—but far more for some than others.

All borrowers with federal student loans are already eligible for a program called Income Based Repayment, which reduces a monthly bill to 15 percent of discretionary income. The executive order would extend eligibility in a similar program, known as Pay as You Earn, to further reduce monthly payments to 10 percent of income. In its current form, PAYE is available only for borrowers who took out their first loans after 2007 and borrowed as recently as October 2011. The executive order on the table would get rid of those exclusions.

So in practice, borrowers who were once excluded—as many as 5 million, according to the early reports—will be able to see their monthly payments cut by as much as one-third. But the biggest windfall will probably be for people who take on a lot of debt, such as business and law students. That’s for two reasons:

First, as Jason Delisle of the New America Foundation told Bloomberg Businessweek in 2012:

“Undergraduates can’t borrow enough, so the change [from IBR to PAYE] is very marginal to them. If you’re only paying $20 a month, a 33 percent reduction in monthly payments is not that big a deal. But if you are paying $800 a month, a 33 percent reduction is a big deal.”

The second reason why grad students may benefit the most is that PAYE has more generous loan forgiveness terms than IBR. Under PAYE, the remaining balance of the student loan is forgiven after 20 years of on-time payments, rather than 25 years under IBR. Delisle explained some scenarios he calculated:

We have one example of someone who might look similar to an MBA student. He starts out with a starting salary of $90,000 and, by the end of 20 years, is making $243,360. Under the old IBR program, he’ll have paid $409,445 by year 25 and be forgiven $23,892 of his loan balance. Under the new [PAYE] plan, he’ll pay less than half of that, or $202,299, and be forgiven $208,259 by year 20.

Earlier this year in his proposed 2015 budget, Obama outlined changes to reduce the benefits for large borrowers like grad students, but those haven’t gone through yet. None of the news reports so far have mentioned whether similar changes will be included in this executive order. Stay tuned today, and we’ll update this post as soon the administration releases more details.