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Proposed Bill Would Revamp Federal Student-Loan Programs

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A introduced to the House of Representatives earlier this month by Rep. Thomas E. Petri, a Wisconsin Republican, would overhaul the federal student-loan programs.听Under the proposal:

  • Monthly payments would be capped at 15 percent of discretionary income鈥攖he new income-based repayment program currently caps payments at 10 percent of discretionary income.
  • Payments would be withheld directly from paychecks鈥攅ssentially eliminating the potential for defaulting, a welcome thought for schools with high default rates (predominately for-profits) which are at risk of losing eligibility to participate in federal aid programs.
  • Interest accrual would be capped at 50 percent of a loan鈥檚 total at the time of graduation鈥攇ood news for borrowers, often low-income, who take upwards of 10 years to repay loans.
  • Subsidies would be eliminated that currently pay interest while undergraduates are in college鈥攁 means of offsetting the cost of capping interest, but potentially detrimental to low-income students.
  • Loan forgiveness after a certain number of years (usually 20 or 25) would be eliminated鈥攖his could dissuade students from entering public-service careers for which loans are currently forgiven after 10 years.

The proposed system resembles those used in the U.K., Australia, and New Zealand. If passed, the new rules would only impact new loans.

While some components of the bill could be beneficial, such as the cap on interest accrual, many other components appear problematic. 听reports that the 听expressed support for the proposal saying, 鈥淲e need to make it as easy as possible for borrowers to stay on the straight and narrow.鈥� But others, such as the advocacy group , worry the bill would 鈥渢ake away some key tools for managing federal student debt,鈥� such as forbearance and deferments.

Since similar proposals from Rep. Petri have had little success in the past and since his latest bill has no cosponsors, the bill is unlikely to be passed.听However, it could be discussed during next year鈥檚 Congressional debate over reauthorizing the Higher Education Act, which expires at the end of 2013.

Senators Ask ED to Investigate For-Profits鈥� Strategies to Lower Default Rates

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Last Wednesday, eight Democratic senators sent a letter to the U.S. Department of Education (ED) asking Education Secretary, Arne Duncan, to investigate strategies that some for-profit colleges allegedly use to falsely lower their cohort default rates (CDRs)鈥攖he rate at which student borrowers default on federal loans. Institutions with high CDRs can face penalties including a loss of eligibility for federal student aid programs.

The letter cites a recent , which presents evidence that for-profits routinely use two tactics
in particular to manipulate CDRs:

  1. “Encouraging or even harassing borrowers” into , which can delay default until after the
    period for which CDRs are typically reported; and
  2. in a way that makes their default rates artificially low.

The senators argue that “for-profit schools should not be able to use administrative smoke and mirrors to circumvent regulations that protect students and taxpayers, and the department should take action to prevent these tactics.” Some for-profits have admitted to using such strategies to 鈥渕anage鈥� their CDRs, but they deny that doing so conflicts with their students鈥� best interests.

For-profits consistently average higher default rates than all other higher education sectors.听 Of the students who began repaying loans in 2009, 22.7 percent of students at for-profits defaulted within three years, while only 11 percent of public students defaulted in that timeframe, and only 7.5 percent of private nonprofit students. In contrast, .听

Comparing for-profits鈥� two-year CDRs with reveals a major, and potentially damning, discrepancy. Fifty percent more students from for profits鈥� defaulted in the three-year timeframe than in the two-year timeframe. The senators say this 鈥渞aises serious questions about how widespread the use of such tactics may be across the sector.鈥�

ED has yet to respond to the senators鈥� letter.

Students Using Income-Based Repayment Program May Face Hefty Tax Bills

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that although the federal government鈥檚 is more affordable for some students, it may come with a hefty, and unexpected tax burden. The federal government will generally forgive whatever loans are left after 10 to 25 years of income-based payments; however, unless you attend a program for teachers or take a job in public service, you will have to pay income taxes on that forgiven debt. For someone who attended graduate or professional school and racked up six-figures of debt, the tax could easily be five-figures and, perhaps most worrisome, would be due immediately.

So, how many people could have to face this formidable tax and what would it amount to for the average borrower? The Education Department estimates that approximately two million people had applied for income-based repayment as of Oct. 31. About 1.3 million of those applicants qualified for reduced payment, another 440,000 applications were still pending. According to the article, 鈥�400,000 borrowers from 2012 through 2021, each with a beginning average loan balance of about $39,500, would each eventually receive loan forgiveness of about $41,000.鈥� The amount forgiven can be larger than the original balance because of accrued interest payments. Depending on your tax bracket, the federal tax on $41,000 of forgiven loans could amount to over $10,000 and, if you live in a state with income taxes, you鈥檇 need to deal with those as well.

That said, since $41,000 is more than double what is given to the average Pell recipient over four-years, a $10,000 tax payment could be considered fair. The and others have argued that the new repayment program provides only marginal benefits to low-income borrowers, but 鈥済enerous benefits to borrowers with higher federal loan balances鈥� who have the potential to earn high incomes later on. As notes, someone who earns $400,000 at the high-point of their career may still receive over $80,000 in loan forgiveness. In the latter situation, a large, lump-sum tax payment is likely very fair.

The article provides some useful resources for those who are participating in the income-based repayment plan and those who are considering it, including:

  • The Project on Student Debt鈥檚 听site,
  • The , and
  • The New America Foundation鈥檚 .

UW’s Impressively-Low Student Loan Default Rates Contrast with National Averages

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Last Friday, the U.S. Department of Education released its annual on federal student loan cohort default rates (CDRs) and, although national CDRs are gloomily high, UW鈥檚 rates are impressively low. As the Department is in the process of switching to a more accurate three-year CDR measure, this year鈥檚 report includes both the FY 2010 two-year and the FY 2009 three-year CDRs. These rates represent the percentage of student borrowers who failed to make loan payments for 270 days within two or three years, respectively, of leaving school.

The Department provides breakdowns of its data by , and . Here are some key findings:

Nationally

  • The FY 2010 two-year CDR increased from 8.8 to 9.1 percent overall. Public institutions increased from 7.2 to 8.3 percent, private nonprofits increased from 4.6 to 5.2 percent, but for-profits decreased from 15.0 to 12.9 percent (though their two-year CDR is still the highest).
  • The FY 2009 three-year CDR is 13.4 percent overall (this is the Department鈥檚 first year reporting three-year data) with public institutions at 11 percent, private nonprofits at 7.5 percent, and for-profits at 22.7 percent.

Locally

  • UW鈥檚 three-year CDR is a remarkable 3.1 percent鈥攎ore than 10 percentage points below the national average.
  • UW鈥檚 two-year CDR increased slightly from 1.4 to 2.1 percent, but is still well below the national average.
  • The State of Washington鈥檚 three-year CDR is 11.3 percent鈥攂elow the national average, but still above approximately half the states.

Unfortunately, the Department does not release loan default rates disaggregated by student demographic (even though it collects this information), which prevents schools from identifying and catering assistance to students with the most need. While third-parties have conducted studies indicating that and are more likely to default on loans, schools and legislators need better data from the federal government in order to fully identify at-risk groups and mitigate rising default rates.