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Obama and Student Loans: Income-Based Repayment

11/01/2012 11:34 am ET | Updated Jan 23, 2014

Last week, we looked at Mitt Romney's policy proposal for job training, the Bush-era Personal Reemployment Accounts. According to an Urban Institute study and a 2004 pilot program of the policy, it doesn't look too promising.

This week, it's President Obama's turn. The past four years have given us a lot to talk about in terms of job training and education, and we'll try to get to everything before the election. Let's start with income-based repayment (IBR) for student loans. Introduced as part of the College Cost Reduction and Access Act of 2007, income-based repayment seeks to ease the pain of repaying student loans, especially for college graduates with relatively-low incomes. The bill was introduced by a Democrat but passed with broad bipartisan support, although Obama, Joe Biden, and John McCain were among the nine senators who didn't vote at all on it.

Under this bill, college graduates who choose an IBR repayment structure for student loans would see their repayments capped at 15 percent of their income, and their loans forgiven after 25 years. In his 2010 State of the Union, President Obama proposed changing these numbers to 10 percent and 20 years. In October 2011, Obama decided to fast-track the program, and to make it available to students who took out loans as early as 2008, so long as they also took one out in 2012.

Income-based repayment, and Obama's alterations of it as president, have good intentions. As the president said in his 2010 speech, "no one should go broke because they choose to go to college." Yet a study published this past Tuesday by the non-partisan New America Foundation found that Obama's changes to IBR aren't projected to have the desired effects. The original policy contained a "cost-of-living" exemption crafted specifically to help low-income graduates. With this exemption still in place, borrowers who earn less than $25,000 after graduation will see their monthly loan payments drop by just $5-$20. Slightly better-off borrowers will get some benefits under the new plan, but only if they take out the maximum possible federal loans, $31,000. Under the new policy, the largest benefits will go to middle-and-high-income borrowers, who don't benefit from the "cost-of-living" exemption. Under the new rules, as these students take out extra loans for graduate school, they'll have the chance to earn higher incomes without paying sticker-price monthly loan payments, and can have some of their debt forgiven even if they make over $100,000.

But will they? Just as policies like IBR encourage students to go to graduate and professional school by making it easier to take out student loans, the promises of future wealth that many grad schools make are coming into question. A landmark article in the March edition of New York Magazine profiles a group of New York Law School grads who sued their alma mater for making false claims about its graduates' employment rate. (The case was thrown out the same month.) The article paints a picture of the growing financial risks of attending law school, and especially schools outside the top tier. In New York State, 9,787 new grads passed the bar in 2009, in hopes of landing one of only 2,100 new positions. Meanwhile, law school tuition rose 317 percent from 2000-2009, dwarfing the 71 percent increase in undergraduate tuition over the same time.

Financial planning offices are well aware of the benefits of IBR. In fact, the New America study reprints an ad ran by the Advantage Group, which hosts www.ibrloan.com. California Western School of Law sent the group a cease-and-desist letter to have the ad removed, and it has now been taken down:

One law school appealed directly to prospective students' ability to repay loans under the new plan.

Source: New America Foundation, "Safety Net or Windfall?"

Although President Obama's change to income-based repayment was made with good intentions, they run the risk of making matters worse. By making it easier to take out loans to go to graduate school, including programs that will saddle graduates with substantial debt and few job prospects, it defers a difficult conversation about education, student borrowing, and job training. It's a conversation we need to have.