By Matt Simonsen*
On June 9th, 2014, President Barrack Obama spoke at the White House about his issuance of a presidential memorandum, which instructs the Department of Education to expand the Pay as You Earn program. The memorandum makes no mention of any specific expansions, other than allowing more people to participate in the program. In addition to expansion of Pay as You Earn, the President states that he wants to improve communication strategies to help vulnerable borrowers, encourage support and awareness of repayment options for borrowers during tax filing season, and promote stronger collaboration to ensure that students and families have the information they need to make informed borrowing decisions. The administration released a fact sheet, detailing the new steps that will be taken to assist students with loan repayment.
The Pay as You Earn program was initially implemented in 2012, with a plan to help reduce student loan payments for graduates in need of assistance. Those who are currently eligible for the program may have their student loan payments reduced to 10% of their monthly income. After 20 years of payments, the remainder is forgiven. Public servants who are enrolled in the program will have the remainder forgiven after 10 years. This program is only available for federal student loans.
During his speech, President Obama discussed the First Lady’s and his struggle to pay back their own educational loans, particularly loans for law school, motivating him to help others paying back student loans. He would like to expand Pay as You Earn to make more Americans eligible for the program. President Obama wants to work with private institutions, such as Sallie Mae, to remind them that they are helping students, not just “collecting payments.” He is also working with various workers’ associations and financial services to help educate students about their loan repayment options. The President stated that these expansions will be funded by the removal of certain tax shelters, which he says have allowed the wealthy to pay extremely low taxes. President Obama has instructed the Secretary of Education to implement these expansions by December 31, 2015.
In his speech, Obama reasoned that no one should be priced out of an education. He cited a letter from a recent graduate who had given up on her future, because she could not afford it with the onslaught of student loan payments. His speech primarily targeted middle class students, who are ineligible for many grants and scholarships. President Obama discussed his intentions to provide assistance for these types of students, so they do not give up on their future, like the author of the letter.
When the Pay as You Earn program was first established, Obama was criticized for stepping over Congress. Critics expressed concern with the type of behavior Pay as You Earn may incentivize—a student can keep borrowing and borrowing without any regard for whether they will be able to pay the loans back. In response, the Department of Education considered that “income-based repayment options may encourage higher borrowing and potentially introduce an unintended moral hazard, especially for borrowers enrolled at schools with high tuitions and with low expected income streams,” but found no viable study supporting this notion, with the hazard similar to that associated with existing loan repayment plans.
When students take out a loan, they form a contractual agreement to return the money borrowed, plus interest. Pay as You Earn allows certain students who have borrowed money, to not pay back what they have borrowed (and previously agreed to repay). Does this invalidate contract law? It seems that it does not. Pay as You Earn stipulates that the federal government will only forgive federal student loans. It does not require other lenders to forgive student loans, so the program does not affect those contracts. Since the federal government only forgives their own loans, it is similar to bank forgiving its own debtors, like Bank of America did for 200,000 homeowners in 2012. In both situations, the lender tells the debtor (despite contractual obligations) that some or all of their loan is “on the house.”
With Obama’s proposed expansion of Pay as You Earn, many students who are not currently eligible may qualify for this program. Here is a link to Federal Student Aid’s Repayment Estimator.
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