PAYE and REPAYE: Long-term student loan repayment plans are a bad option for older student-loan debtors

You can be young without money, but you can't be old without it.

Tennessee Williams

President Obama's Department of Education is pushing distressed student-loan debtors into long-term income-based repayment plans. Five million people are in them now, and DOE hopes to enroll two million more by the end of next year.  Without a doubt, DOE will reach this goal. In fact, I predict at least 10 million people will be enrolled in long-term repayment plans within four years.

To advance this goal, the Obama administration launched two new income-based repayment programs: PAYE and REPAYE. These are the most generous of the government's eight income-based repayment plans. PAYE and REPAYE allow debtors to make payments equal to ten percent of their adjusted gross income for 20 years. At the end of that time, any unpaid debt is forgiven, although debtors may be forced to pay federal income tax on the forgiven portion of their loans.

As I have argued repeatedly, long-term income-based repayment plans are nothing more than a cynical scheme to hide the magnitude of the student-loan crisis.  By lowering monthly payments, the Feds hope to keep the student-loan default rate down even though most people in these programs are making payments so low that they will never pay off their student loans.

Nevertheless, I understand why debtors are signing up for these plans. If they've had their loans in deferment for any considerable length of time, their loan balances will have ballooned to double the amount they borrowed or more because of accrued interest. Once that happens, they will never be able to pay off their student loans over the conventional 10--year repayment term.  In short, people with large loan balances and low-paying jobs have no choice--they are forced to enter 20- or 25-year repayment plans in order to avoid default.  

But long-term repayment plans are a terrible option for older student-loan debtors. People in their forties, fifties and sixties need to maximize their retirement savings in order to be able to retire with dignity; and most of them of them can't do that if they are making student-loan payments equal to  10 or 15 percent of their annual income.

In fact, the evidence is mounting that the baby boomer generation is not ready for retirement; and millions are facing dire poverty if they lose their jobs. A recent article in the Star Tribune reported that two thirds of households in the 55-64 age group have savings that equal less than their annual income and one third have no savings at all.

According to the National Institute on Retirement Security, the median retirement account savings among households in the 55-64 age range is only $14,500! Due to the recent recession and stagnant wages, millions of Americans have been forced to cash out their retirement accounts just to meet daily living expenses. More than 40 percent of Americans have elected to take Social Security benefits early in recent years because they need the cash, even though early participation reduces annual benefits by 25 percent.

Obviously, the last thing financially strapped Americans need as they grow older is a 20-year obligation to contribute a percentage of their income to pay off student loans.  Although long-term repayment plans can be defended for people who enroll in them when they are young, they are a disaster for people who sign up for PAYE or REPAYE or the six other income-based repayment plans when they are in their forties or even older.

But the government  and the student-loan creditors insist on pushing student-loan debtors into these plans regardless of their age.  For example, in the Halverson case, decided in 2009, Educational Credit Management Corporation argued that Steven Halverson should enter a 25-year income-based retirement plan even though he was 65 years old, had chronic health problems, and had an income of only about $13 an hour.  (Fortunately, a Minnesota bankruptcy judge was sympathetic to Mr. Halverson's plight and discharged his student-loan debt.)

And in the Stevenson case, a Massachusetts bankruptcy judge insisted that a woman in her fifties sign up for a long-term income-based repayment plan even though she had a record of homelessness and was living on only $1,000 a month.

Perhaps most famously, ECMC hounded Janet Roth through the courts all the way to the Ninth Circuit Bankruptcy Appellate Panel, heartlessly arguing that Roth should be on an income-based repayment plan to pay off more than $90,000 in student-loan debt even though she was 68 years old, had  chronic health problems and was living entirely off her Social Security income of $780 a month.

As a matter of public policy, the federal government simply must stop pressuring student-loan debtors who are in their forties or older into long-term repayment plans because this practice is making it impossible for these people to prepare for retirement.

We should occasionally remind ourselves why the federal student-loan program was inaugerated in the first place. The program's sole purpose is to enable people to get postsecondary education that will improve their lives.  

But for millions of Americans, the federal student-loan program has driven them to the brink of indigence. And if they are forced to make loan payments until they are in their sixties, their seventies, or their eighties, we will have created a class of elderly debtors who will spend their final years in poverty and want.  

In short, no one who is 40 years old or older should be forced into a 20- or 25-year student-loan repayment plan,  No one.  Older student-loan debtors who are otherwise eligible for bankruptcy relief should be able to shed their student-loan debt in the bankruptcy courts rather than be saddled with monthly student loan payments that will extend into their retirement years.

References

Bob Brenzing. AP Poll: Many take Social Security before full retirement, May 26, 2016.Fox News 17. Accessible at http://fox17online.com/2016/05/26/ap-poll-many-take-social-security-before-full-retirement/

 Michael Greenstone and Adam Looney. The Uncomfortable Truth About American Wages. Brooking Institution, October 23, 2012. Accessible at http://www.brookings.edu/research/opinions/2012/10/22-wages-greenstone-looney

Katy Read. The real story about retirement: Millions of baby boomers face financial crisis.  Star Tribune, Ocrober 21, 2015.  Accessible at http://www.startribune.com/the-real-story-about-retirement-millions-of-baby-boomers-face-financial-crisis/334718191/

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP  2013). 

Stevenson v. Educational Credit Management Corporation, 463 B.R. 586 (Bankr. D. Mass. 2011).

John F. Wasik. Social Security At 62? Let's Run the Numbers. New York Times, May 14, 2014. http://www.nytimes.com/2014/05/15/business/retirementspecial/social-security-at-62-lets-run-the-numbers.html