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http://online.wsj.com/article/SB10001424127887324059704578471223436096876.html
Cutting Down Student Debt
By JOSH MITCHELL and DOUGLAS BELKIN
The White House proposes that the government forgive billions of dollars in student debt over the next decade, a plan that cheers student advocates, but critics say it would expand a program that already encourages students to borrow too much and stick taxpayers with the bill.
The proposal, included in President Barack Obama's budget for next year, would increase the number of borrowers eligible for a program known casually as income-based repayment, which aims to help low-income workers stay current on federal student debt.
Michal Czerwonka for The Wall Street Journal
Liliana Rodriguez-Marshall, a recent graduate of Southwestern Law School in Los Angeles, owes more than $300,000 in federal loans.
Borrowers in the program make monthly payments equivalent to 10% of their income after taxes and basic living expenses, regardless of how much they owe. After 20 years of on-time payments10 years for those who work in public or nonprofit jobsthe balance is forgiven.
Under the program, most borrowers with loans issued since October 2007 are eligible to participate. The budget proposalwhich requires congressional approvalwould let all borrowers with pre-2007 loans participate and would make tax exempt any debt forgiven through the program. (Loan forgiveness can be considered taxable income.)
Administration officials and student advocates say the expansion is needed to stem rising defaults on federal loans and prevent the related damage to households and the economy.
Abraham White of Campus Progress, part of the liberal think tank Center for American Progress, said Mr. Obama's plan "ensures that monthly payments are affordable" for all borrowers and "creates a reasonable pathway to paying off their debt, which benefits the whole economy."
Thursday, the debate over federal student loans intensified with House Republicans and Senate Democrats introducing dueling bills that would replace the current fixed rates with variable rates tied to the government's borrowing costs.
A bill by House Education Committee Chairman John Kline (R., Minn.) would set rates higher than those proposed by the No. 2 Senate Democrat, Richard Durbin of Illinois, but also cap rates so they don't exceed a certain threshold. The measures are designed to prevent rates on certain new federal loans from doubling to 6.8% starting July 1.
It isn't clear whether Congress will approve Mr. Obama's proposal. Lawmakers have been gridlocked over budget issues and some GOP lawmakers and private analysts have criticized the current income-based repayment program. In their view, it encourages students to take on big debt, knowing much of it will be forgiven, and enables schools to raise tuition, relying on the government to pick up the tab.
Critics also see debt forgiveness as a taxpayer gift for those who need it the least: white-collar graduate-degree holders, such as lawyers and doctors.
"I think of it as a ticking time bomb," Rep. Tom Petri (R., Wis.), a senior member of the House Education Committee, said of the current program.
Liliana Rodriguez-Marshall, a 30-year-old mother of three who graduated from Southwestern Law School in Los Angeles in December owing more than $300,000 in federal loans, plans to take advantage of the current program.
"Without it [my debt] would be unmanageable," she said.
Ms. Rodriguez-Marshall said she racked up the debt by spreading her degree over 4½ years from the normal three and taking out student loans to cover living expenses, which the government allows.
During her studies her husband was laid off and she twice had to take out emergency student loans totaling more than $30,000 to make home repairs, pay unexpected medical costs and keep up with the family's $1,000-per-month health-insurance bills, she said.
She now is applying for government jobs that pay about $55,000 a year. According to a repayment calculator created by the New American Foundation, a Washington-based think tank, Ms. Rodriguez-Marshall would pay $273 per month in her first year under the program; without it, she would owe $3,562 a month. Under the program, she would pay about $102,000 over 10 years, and the government would forgive about $639,000, which includes interest.
The two sides disagree about the costs of loan forgiveness. The Education Department estimates that under the current program, 400,000 borrowers will have an average $41,000 in student debt forgiven through 2021, totaling $16.4 billion. The department says the cost will be covered in part by interest payments on student loans.
Department spokesman Daren Briscoe said it didn't have an estimate of the cost of the proposal to expand the program.
Critics say the administration underestimates the costs. Economists at Barclays BARC.LN +0.55% PLC said the current program, along with loan defaults, could cost the government $300 billion between now and 2020. Barclays hasn't released an estimate of the Obama proposal's costs.
The income-based repayment program was created by law in 2007 during the Bush administration, with payments limited then to 15% of income and continuing for 25 years before the balance was forgiven.
In 2010, as part of Mr. Obama's health-care overhaul, the income limit was to be lowered to 10% and the repayment period shortened to 10 years for public-service workers and 20 years for private-sector workers, beginning with loans made in July 2014. Mr. Obama, through an executive action, moved up the start date of these rules to December and covered loans made since October 2007.
The government caps the amount that an undergraduate student can borrow, at $57,500. However, graduate students essentially have no capthe so-called "Grad Plus" program allows them to borrow up to whatever their respective college charges.
Mr. Petri said some congressional staffers are staying in government jobs, rather than go into the private sector, specifically to take advantage of the program's terms. "Some of them are very aware they've taken out big student loans and then they're deciding where they're going to work" based on how much debt would be forgiven.
Write to Josh Mitchell at [email protected] and Douglas Belkin at [email protected]
A version of this article appeared May 10, 2013, on page A3 in the U.S. edition of The Wall Street Journal, with the headline: Cutting Down Student Debt.
Cutting Down Student Debt
By JOSH MITCHELL and DOUGLAS BELKIN
The White House proposes that the government forgive billions of dollars in student debt over the next decade, a plan that cheers student advocates, but critics say it would expand a program that already encourages students to borrow too much and stick taxpayers with the bill.
The proposal, included in President Barack Obama's budget for next year, would increase the number of borrowers eligible for a program known casually as income-based repayment, which aims to help low-income workers stay current on federal student debt.
Michal Czerwonka for The Wall Street Journal
Liliana Rodriguez-Marshall, a recent graduate of Southwestern Law School in Los Angeles, owes more than $300,000 in federal loans.
Borrowers in the program make monthly payments equivalent to 10% of their income after taxes and basic living expenses, regardless of how much they owe. After 20 years of on-time payments10 years for those who work in public or nonprofit jobsthe balance is forgiven.
Under the program, most borrowers with loans issued since October 2007 are eligible to participate. The budget proposalwhich requires congressional approvalwould let all borrowers with pre-2007 loans participate and would make tax exempt any debt forgiven through the program. (Loan forgiveness can be considered taxable income.)
Administration officials and student advocates say the expansion is needed to stem rising defaults on federal loans and prevent the related damage to households and the economy.
Abraham White of Campus Progress, part of the liberal think tank Center for American Progress, said Mr. Obama's plan "ensures that monthly payments are affordable" for all borrowers and "creates a reasonable pathway to paying off their debt, which benefits the whole economy."
Thursday, the debate over federal student loans intensified with House Republicans and Senate Democrats introducing dueling bills that would replace the current fixed rates with variable rates tied to the government's borrowing costs.
A bill by House Education Committee Chairman John Kline (R., Minn.) would set rates higher than those proposed by the No. 2 Senate Democrat, Richard Durbin of Illinois, but also cap rates so they don't exceed a certain threshold. The measures are designed to prevent rates on certain new federal loans from doubling to 6.8% starting July 1.
It isn't clear whether Congress will approve Mr. Obama's proposal. Lawmakers have been gridlocked over budget issues and some GOP lawmakers and private analysts have criticized the current income-based repayment program. In their view, it encourages students to take on big debt, knowing much of it will be forgiven, and enables schools to raise tuition, relying on the government to pick up the tab.
Critics also see debt forgiveness as a taxpayer gift for those who need it the least: white-collar graduate-degree holders, such as lawyers and doctors.
"I think of it as a ticking time bomb," Rep. Tom Petri (R., Wis.), a senior member of the House Education Committee, said of the current program.
Liliana Rodriguez-Marshall, a 30-year-old mother of three who graduated from Southwestern Law School in Los Angeles in December owing more than $300,000 in federal loans, plans to take advantage of the current program.
"Without it [my debt] would be unmanageable," she said.
Ms. Rodriguez-Marshall said she racked up the debt by spreading her degree over 4½ years from the normal three and taking out student loans to cover living expenses, which the government allows.
During her studies her husband was laid off and she twice had to take out emergency student loans totaling more than $30,000 to make home repairs, pay unexpected medical costs and keep up with the family's $1,000-per-month health-insurance bills, she said.
She now is applying for government jobs that pay about $55,000 a year. According to a repayment calculator created by the New American Foundation, a Washington-based think tank, Ms. Rodriguez-Marshall would pay $273 per month in her first year under the program; without it, she would owe $3,562 a month. Under the program, she would pay about $102,000 over 10 years, and the government would forgive about $639,000, which includes interest.
The two sides disagree about the costs of loan forgiveness. The Education Department estimates that under the current program, 400,000 borrowers will have an average $41,000 in student debt forgiven through 2021, totaling $16.4 billion. The department says the cost will be covered in part by interest payments on student loans.
Department spokesman Daren Briscoe said it didn't have an estimate of the cost of the proposal to expand the program.
Critics say the administration underestimates the costs. Economists at Barclays BARC.LN +0.55% PLC said the current program, along with loan defaults, could cost the government $300 billion between now and 2020. Barclays hasn't released an estimate of the Obama proposal's costs.
The income-based repayment program was created by law in 2007 during the Bush administration, with payments limited then to 15% of income and continuing for 25 years before the balance was forgiven.
In 2010, as part of Mr. Obama's health-care overhaul, the income limit was to be lowered to 10% and the repayment period shortened to 10 years for public-service workers and 20 years for private-sector workers, beginning with loans made in July 2014. Mr. Obama, through an executive action, moved up the start date of these rules to December and covered loans made since October 2007.
The government caps the amount that an undergraduate student can borrow, at $57,500. However, graduate students essentially have no capthe so-called "Grad Plus" program allows them to borrow up to whatever their respective college charges.
Mr. Petri said some congressional staffers are staying in government jobs, rather than go into the private sector, specifically to take advantage of the program's terms. "Some of them are very aware they've taken out big student loans and then they're deciding where they're going to work" based on how much debt would be forgiven.
Write to Josh Mitchell at [email protected] and Douglas Belkin at [email protected]
A version of this article appeared May 10, 2013, on page A3 in the U.S. edition of The Wall Street Journal, with the headline: Cutting Down Student Debt.
