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Loan Help for the Middle Class

January 26, 2010

From the start, President Obama has put the importance of higher education and of students' access to college near the top of his agenda, proposing a restructuring of federal student loan programs to boost financial aid and sending tens of billions of dollars in stimulus funds to students and colleges.

So it's no surprise that as the president, after several rough weeks, seeks to regain his political footing by starting his second year in office with a broad appeal to the middle class, college access and affordability are again at the core of the plan.

The White House announced Monday that the president's State of the Union speech tomorrow night would, as part of a package of comparatively small-scale initiatives aimed at improving the economic lot of middle class Americans, ask Congress to expand the government's newly created Income-Based Repayment Program to reduce the payments of hundreds of thousands more borrowers with sizable loan burdens and comparatively low salaries. The proposals come from the White House's Middle Class Task Force, led by Vice President Joe Biden.

(The State of the Union speech may include some not-so-good news for colleges and students, though: The New York Times reported late Monday that the president would seek a three-year freeze in most domestic spending programs beginning in 2011, which could mean real-dollar reductions for many financial aid, scholarly research and other programs important to higher education. The Times article said the only programs exempted would be those for defense, foreign aid, veterans, and homeland security, as well as the main federal entitlement programs of Medicare, Medicaid and Social Security.)

The income-based repayment program, which was created by the College Cost Reduction and Access Act of 2007 and took effect last summer, caps monthly repayments for borrowers with federally subsidized loans at 15 percent of discretionary income (defined as the difference between adjusted gross income and 150 percent of the federal poverty rate for the borrower's family size and state), and forgives the unpaid balance for a borrower after 25 years. Standard student loan repayment is over 10 years.

The income-based program was designed especially to provide a feasible way for graduates with loan debt to consider public service or other lower-paying jobs, and according to a 2005 Education Department report, about 16 percent of all subsidized loan borrowers had monthly payments greater than 15 percent of their discretionary income.

Under the administration's proposal, the program would extend to the nearly 36 percent of borrowers whose loan repayments exceed 10 percent of their income (instead of the current 15 percent), and would forgive unpaid balances after 20 years instead of 25. The proposal echoes a recommendation made last year (see page 23) by the National Association of Student Financial Aid Administrators and, in calling for a 20- rather than 25-year window, endorses a suggestion from the Rethinking Student Aid panel convened by the College Board.

In an example provided by the Institute for College Access and Success, a single person who owes $33,000 in federal loans and makes $30,000 a year would pay about $110 a month under the proposal, compared with about $380 a month under standard repayment. Under the current income-based program, the borrower would owe $170 a month.

"People are worried about student loan payments, and this is an area where, by making some relatively simple adjustments in an existing program, we can help with the pressures that families are under," Robert Shireman, deputy under secretary of education, said in an interview about the administration's proposal Monday. Shireman said the proposal would be included in the White House's 2011 budget proposal, which is due early next month.

Because the existing income-based program has been in place only since July, there is little information about how much it has been used and, as such, exactly how much the new program is likely to cost. Mark Kantrowitz, publisher of Finaid.org and a leading financial aid analyst, estimated the cost at about $1 billion over five years.

Reaction to the administration's proposal was uniformly positive from advocates for students and colleges. "This is a timely proposal, given the pressures that families are under," said Lauren Asher, president of the Institute for College Access and Success, whose Project on Student Debt (which Shireman formerly led) helped create the income-based repayment program.

Asher's group and others have argued that restrictions on the existing income-based program have impaired its use; students whose loans are forgiven after 25 years face major tax penalties, and a drafting error resulted in a "marriage penalty" that requires couples who file taxes jointly to pay significantly more than they would otherwise.

The Obama administration's new proposal is independent of its lingering plan to transform the student loan programs and shift tens of billions of dollars toward Pell Grants, community colleges and other purposes -- a plan that remains in limbo amid the Congressional disarray over health care reform.

Since last week's special election in Massachusetts threw the Washington political scene into turmoil, there has been much speculation about how the new balance of power in Congress might affect the prospects of the Student Aid and Financial Responsibility Act, which has passed the House and is pending in the Senate. Critics of the Obama plan, especially, have used the turmoil to escalate their opposition.

But all of the speculation is just that, and the picture remains too murky to write about intelligently.

 

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