September 23, 2017

Expansion of PAYE Income Based Repayment Rules Not Likely to have much Impact

PAYE rules expandedYou may have heard that on June 9, 2014, President Obama signed an executive order expanding the PAYE (Pay-As-You-Earn) program. According to the President, this action is intended to “make student debt more affordable and manageable to repay.” But will this executive order really have much impact?

The PAYE program is one of several income based repayment options available to student loan borrowers. It uses a formula whereby a student loan borrower can modify the repayment terms of his loan and pay back that loan using a payment that does not exceed 10% of the borrower’s discretionary income. After 20 years of payments, any remaining indebtedness will be forgiven.

Currently PAYE is only available to new borrowers – students who graduated prior to 2013 do not qualify. Older graduates have other loan modification options available like the income based repayment plan which is similar to PAYE but caps payments at 15% of discretionary income and forgives the balance after 25 years of payment.

Under Obama’s executive order, PAYE will be available to all student loan borrowers, not just members of the class of 2013 and future graduates. The new PAYE eligibility begins in December, 2015, so older graduates will have to wait at least a year and a half to take advantage of these new rules.

While the expansion of PAYE may help some student loan debtors, the current PAYE program has not been used very much. Currently only 50,000 borrowers have enrolled in a PAYE program – although 1.6 million borrowers currently qualify for PAYE. Under the new rules (beginning in 2015) perhaps 5 million borrowers total would qualify for PAYE.

PAYE also does not and will not apply to parent PLUS loans, FFEL loans or private student loans.

CNN Money notes that PAYE and other income based programs are designed only to help the poorest borrowers living on the edge. No more than 10% of the 40 million student loan borrowers in the country would benefit from existing student loan forgiveness programs.

Joshua Cohen, a student loan lawyer in Connecticut argues that Mr. Obama’s expansion of PAYE “is not a solution, it is a bandage.”

It doesn’t make college more affordable. It doesn’t cap maximum loan amounts. It doesn’t create underwriting standards. It doesn’t return bankruptcy or other consumer protections to federal student loans. It doesn’t address the private student loan debacle (you know, the loans that supposedly have underwriting standards that allow an 18 to 22 year old to rack up $100,000 in debt with no credit history, ropes in a relative as a co-signer, offers no flexible repayment terms, and is also exempt from discharge in bankruptcy). It doesn’t even apply to all federal student loans (Parent PLUS loans are not eligible)! This is, at best, a baby step forward.

I agree with Joshua’s assessment but I would go further.  Solutions to spiraling student loan debt in the United States should not focus on repayment plans. Instead, they should require colleges and universities that benefit from student loan money to show that the education they offer provides value to graduates. Government issued student loans provide the operating capital for colleges, yet college administrators bear no financial repercussions if graduates enter the labor market that pays salaries insufficient to support a graduate’s student loan obligations.

A recent client of mine, for example, earns just over $30,000 annually, but owes over $80,000 in student loan debt. If a college’s access to student loan money was tied to the earning capacity of graduates and/or the loan default numbers of those graduates, you can be sure that schools would find a way to keep tuition costs down.

So, when all is said and done, PAYE gives the politicians an opportunity to say that they are doing something about student loan debt, without really doing much to solve the problem.

Jonathan Ginsberg

Jonathan Ginsberg

Attorney at Law at Ginsberg Law Offices
Jonathan Ginsberg has served the Atlanta area community as a personal bankruptcy and student loan debt management lawyer for over 25 years. Contact Jonathan for straight answers to difficult debt problems.
Jonathan Ginsberg
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Jonathan Ginsberg

Jonathan Ginsberg has served the Atlanta area community as a personal bankruptcy and student loan debt management lawyer for over 25 years. Contact Jonathan for straight answers to difficult debt problems.

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