Obama Uses Power Of The Pen To Address Student Debt
June 13 2014
President Barack Obama signs a Presidential Memorandum on reducing the burden of student loan debt, Monday, June 9, 2014, in the East Room of the White House in Washington. The president said the rising costs of college have left America's middle class feeling trapped. He says no hard-working youngster in America should be priced out of a higher education. Obama signed a presidential memorandum he says could help an additional 5 million borrowers.
By: Gurwin Singh Ahuja
President Obama recently used his executive authority to reduce the burden of student debt for potentially 5 million borrowers.
The President’s announcement comes at a time when the need to take action on the country’s student debt crisis has never been more urgent. There are roughly 40 million borrowers who owe more than $1.2 trillion. The growing pile of student debt is harming the economy by preventing young Americans from purchasing homes, cars, and even starting families.
As part of the President’s pledge to make 2014 a year of action, his announcement ensures that meaningful steps are taken to lift Americans from crushing student debt.
The President’s announcement has four main components:
1. Expand The Pay As You Earn Program.
In 2012, the Obama administration adopted an income based repayment plan called Pay As You Earn (PAYE), which makes student loan payments more manageable for borrowers with direct federal loans by tying monthly payments to income.
The plan specifically ensures that a borrower’s student loan payment is no more than 10 percent of their discretionary income (i.e. income that is left over for non-essential goods and services).
Additionally, under PAYE, a borrower may have their balance forgiven after 20 years with on-time payments. If a borrower works in the public sector, they may be eligible for Public Service Loan Forgiveness, and their loans would be forgiven after 10 years.
When first announced, PAYE was limited to borrowers who did not borrow before October 2007 and took out a new loan on or after the beginning of October 2011.
In his executive order, the President directed the Secretary of Education to remove this limitation and ensure that all student loan borrowers with direct federal loans can cap their loan payments to 10 percent of their discretionary income. The expansion is projected to assist 5 million borrowers and is expected to be released by December 2015.
2. Renegotiate Contracts With Sallie Mae And Other Student Loan Servicers To Ensure Better Service For Students.
The Department of Education is renegotiating contracts with student loan servicers so that servicers are doing everything they can to help borrowers pay back their loans, which has not always been the case.
For example, reports show that Sallie Mae, the largest servicer of federal student loans, failed to enroll borrowers that were behind on their loans into key programs designed to reduce the burden of student debt.
Two key pieces of the renegotiations include the Department of Education boosting incentives to servicers to help borrowers pay their loans on time and decrease payments to servicers if loans become delinquent or enter default.
3. Streamline Student Loan Relief For Active Duty Military Officers.
Under the Service member Civil Relief Act, all lenders must cap interest rates on student loans at six percent for eligible service members. Currently, the Department of Education directs loan servicers to match student borrower information to the Department of Defense databases to find eligible active duty military officers.
Now, the Department of Education will cut out servicers as the middle man and reduce the interest rates automatically without additional paperwork.
4. Ensure That Student Loan Borrowers Knows Their Options When Paying Back Their Student Loans.
Student loan borrowers can take advantage of a number of programs to payback their loans; however, navigating through all the student loan programs can be difficult.
First, the Obama administration is forming public-private partnerships with Intuit, Inc. and H&R Block, the two largest tax preparation firms in the U.S., to spread the word about student loan repayment options during tax time.
The administration will also work with Mint.com, Intuit’s free personal finance management product that can provide individual guidance on student loan programs to its 15 million users.
Also, by the end of 2014, the Department of Education will use data analytics to
target borrowers who are struggling to payback their federal student loans and communicate the information they need to select the best repayment option.
The actions taken by Obama on Monday are firm steps that can reduce the crippling burden of student loans. The President also announced his support for Senator Elizabeth Warren’s (D-MA) bill, Bank on Students Emergency Loan Refinancing Act (S. 2432) because, as he noted in his announcement, his ability to assist student loan borrowers is far greater with the cooperation of Congress.
On Wednesday the Senate voted 56-34 on a procedural measure that would have allowed an actual vote on the Bank on Students legislation. While the motion received bipartisan support, unfortunately it did not meet the needed 60-vote threshold. The legislation would have benefitted 25 million student loan borrowers by allowing them to refinance their federal and private loans to lower interest rates and better terms.
The President’s strong actions underscores the broader realization by lawmakers that growing student loan debt is crippling the economy and the country and needs to be addressed.