Obama Administration Provides Additional Student Loan Plan Details

Obama administration officials provided additional details about their plans to provide relief for some student loan borrowers, but say that the U.S. Department of Education will use negotiated rulemaking to develop implementation details for the plan to offer more generous Income Based Repayment (IBR) terms in 2012.

The administration indicated that the incentive for borrowers who consolidate their Federal Family Education Loans (FFEL) and Direct Loans will only be offered to a limited pool of borrowers. Eligible borrowers will be notified by the Department and must consolidate between Jan. 1, 2012 and June 30, 2012 because the recent Budget Control Act eliminates the Department’s authority to provide borrower incentives after June 30, 2012. The administration encourages borrowers with FFEL and Direct Loans to wait until Jan. 1, 2012 to consolidate so they can benefit from the incentive. 

Regarding the more generous IBR terms,  the administration says that the plan would not override the current IBR program, but would operate separately.  The more generous terms will only be available to borrowers who received a federal loan since 2008 and also receive a federal loan in 2012. The plan will be a topic at the upcoming loan-related negotiated rulemaking and will likely fall under the “early implementation” provision—meaning that the Department can enact it early. Many specific details are not yet available and will likely not be addressed until negotiated rulemaking and implementation.

However, the administration may release additional details in response to a request by House Education and the Workforce Committee Chairman John Kline (R-MN). Kline sent a letter to Education Secretary Arne Duncan requesting an explanation of how the proposal would impact taxpayers,  the timeline for implementation and how the Department will explain these programs to borrowers.

Background

The Obama administration announced on Oct. 25 two initiatives aimed at lowering monthly student loan payments for borrowers struggling to repay their loans. The announcement was part of a series of executive actions the White House seeks to implement without Congressional approval.  

Under the administration’s plan:

  • Students with both Federal Family Education Loans (FFEL) and Direct Loans will be offered an incentive to participate in a special consolidation into the Direct Loan program
  • More generous income-based repayment (IBR) terms will be fast-tracked to become effective in 2012 instead of 2014

Currently, nearly 6 million students have loans from both FFEL and DL servicers.  The administration plans to offer repayment incentives for students with split servicers if they move all of their loans over to DL.  Students would be able to receive up to a 0.5 percent reduction to the interest rate on some of their loans—.25 percent reduction on consolidated FFEL loans and an another .25 percent reduction for borrowers who use the Department's automatic electronic debit system.  The administration has referred to this initiative as a "special" consolidation where students will be able to keep the terms and conditions of their initial loans.

In 2010, Congress passed changes to the IBR program to limit monthly payments to 10 percent of discretionary income (down from the current 15 percent) and forgiving remaining debt after 20 years (down from the current 25 years). The Obama administration hopes to implement these changes, deemed  the Pay As You Earn (PAYE) plan, two years ahead of schedule, beginning in 2012.   

The IBR program bases monthly payments on any income above 150% of the poverty line. So a borrower living alone would pay 10% of anything earned above $16,335 (according to the 2011 poverty level). Unemployed borrowers with no income could owe no monthly payments and still be considered eligible for loan forgiveness after 20 years. However, interest continues to accrue on these loans and borrowers who don't qualify for loan forgiveness could end up paying more.

The administration wants to implement these initiatives quickly, but House Republicans have expressed opposition to these initiatives and claim that the administration doesn't have the authority to implement these programs.