Under both PAYE and REPAYE, college-loan debtors make monthly payments based on their income, not the amount they borrowed. Payment rates are established annually, based on the borrower's reported income for the previous year, with payments calculated to equal10 percent of the borrower's discretionary income.
In many ways, REPAYE is a good deal for overburdened student-loan debtors. Monthly payments will be lower than the standard 10-year repayment plan; and payments will be allowed to fluctuate as borrowers' income goes up or down. People who are unemployed or who live at the poverty level won't be required to make any payments at all.
All in all, the Obama administration's latest student-loan program is incredibly generous. In fact, most debtors on the REPAYE plan will be making monthly payments so low that they won't cover accruing interest on their loans. In other words, at the end of the 20-year repayment program, most debtors will still have large balances on their loans, which will be forgiven. The forgiven amount will be absorbed by taxpayers.
Why did the Obama administration launch REPAYE, which could reasonably criticized as fiscally irresponsible? I will tell you why: it had no choice.
For years, the government has permitted overburdened student-loan debtors to enroll in economic hardship deferment programs and other forbearance plans that allowed borrowers to temporarily skip their monthly student-loan payments. Colleges encouraged this practice as a way to keep their short-term student-loan default rates down--particularly the for-profit colleges, which needed to keep their default rates below 30 percent in order to continue receiving federal student-aid money.
For some people on these plans, however, the forbearances weren't temporary--they stretched out for years while interest accrued on their original debt. Thus for virtually everyone in a forbearance or deferment program, their loan balances were getting larger with each passing month due to accruing interest.
This phenomenon was documented in a recent Brookings Institution report written by Looney and Yanelis. These scholars found that loan balances were going up, not down, two years into the repayment period for more than half of student-loan borrowers in repayment.
In fact, for millions of people who have had their student loans in nonpayment status for any considerable period of time, it has become virtually impossible to to pay back their loans. This state of affairs drove many debtors into default, which caused their balances to grow even larger due to the penalties and fees that got tacked on to their debt.
President Obama and Arne Duncan could see that there were only two ways out of this morass. Either people must be allowed to file for bankruptcy to discharge their college-loan debt or their loans have to be refinanced to make the monthly payments lower. Since bankruptcy reform is politically impossible, Obama and Duncan chose to launch PAYE and REPAYE.
But there are enormous problems with the Obama administration's fix. First, most people entering PAYE and REPAYE are not enrolling immediately after graduating from college. Most struggle for a few years to make payments under the standard 10-year plan and then enter REPAYE because they can't service their loans. For these people, enrolling in a 20-year repayment plan extends their repayment period out over their entire working lives.
Butler v. Educational Credit Management Corporation, decided earlier this year, illustrates this problem. Beverly Butler struggled for almost 20 years to make payments on loans she took out to get her college degree, which she obtained in 1995. Eventually, she enrolled in a 25-year repayment plan that stretches out her loan repayment period until 2037--42 years after she graduated from college!
And of course the other big problem with PAYE and REPAYE is that most people in these programs are not paying back their loans at all; they are making token payments that don't cover accruing interest. In essence, these programs are designed to disguise the fact that for all practical purposes, people in long-term repayment programs have defaulted on their loans.
This is no small matter. Almost 5 million people are in income-based repayment plans now; and the Department of Education wants to enroll 2 million more by the end of next year. Without question, REPAYE is going to be the default option for most student-loan debtors in the years to come, which is what the Brookings Institution and other higher-education industry insiders want to happen.
In reality, the Obama administration has imposed a tax on most people who borrow money to attend college; REPAYE participants will be obligated to pay a percentage of their incomes for a majority of their working lives in return for the privilege of going to college.
How ironic. Barack Obama, self-proclaimed friend of the disadvantaged, has established a huge sharecropper program for college goers. Ultimately of course, all Obama did was buy time for the college industry. In the long run, REPAYE can't sustain the status quo. At some time in the not too distant future, higher education as we now know it will collapse.
And the first cards to fall in this house of cards will be the for-profit colleges and the small private liberal arts colleges. Be patient. You don't have long to wait.
Enrollment at four-year for-profit colleges declined 9.3 percent from last year, and the University of Phoenix's enrollment has declined by half from its peak years. The private liberal arts colleges are behaving like a Texas fireworks stand (Buy One, Get One Free!!), discounting tuition for first-time freshman by 48 percent.
The end is near.
Erin E. Arvedlund. A new way, REPAYE, to get out of college debt. Philadelphia Inquirer, March 29, 2016. http://articles.philly.com/2016-03-29/business/71877131_1_income-based-repayment-plan-loan-debt-standard-repayment-plan.
Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults
Rick Seltzer. Discount rates rise yet again at private colleges and universities. Inside Higher Ed, May 16, 2016. Accessible at https://www.insidehighered.com/news/2016/05/16/discount-rates-rise-yet-again-private-colleges-and-universities.
Kelly Woodhouse. (2015, November 25). Discount Much? Inside Higher Ed. Accessible at: https://www.insidehighered.com/news/2015/11/25/what-it-might-mean-when-colleges-discount-rate-tops-60-percent?utm_source=Inside+Higher+Ed&utm_campaign=389f6fe14e-DNU20151125&utm_medium=email&utm_term=0_1fcbc04421-389f6fe14e-198565653
Enrollments slide, particularly for older students. Inside Higher Ed, May 24, 2016. Accessible at https://www.insidehighered.com/quicktakes/2016/05/24/enrollments-slide-particularly-older-students?utm_source=Inside+Higher+Ed&utm_campaign=74ec3a191d-DNU20160524&utm_medium=email&utm_term=0_1fcbc04421-74ec3a191d-198564813