What New IBR Plan Did Obama Propose Now?

Yesterday, President Obama announced he will provide a more generous income-based repayment plan for individuals who took out student loans prior to October 2007. Unfortunately, the plan is currently high on rhetoric and short on details.

The president seems to be proposing an expansion of Pay As You Earn (PAYE). That plan was established through a similar executive order that created an income-based plan to mimic changes Congress and the president made to the Income-Based Repayment plan through legislation in 2010 (New IBR, which will go into effect July 2014.) Sound complicated? It’s about to get worse.

Due to budgetary constraints, the president limited PAYE at the time to borrowers who took out their first loan starting in 2007 or later and their last loan in 2011. And the 2010 law creating the more generous Income-Based Repayment program included a delayed start for the same reasons. As opposed to Old IBR (the plan for all borrowers before 2014) which set payments at 15 percent of discretionary income and allowed for loan forgiveness after 25 years, PAYE and New IBR set payments at 10 percent and provided loan forgiveness after 20 years. The latest action looks to be a repeat of the action to create PAYE.

If you’re confused, that’s probably because by going through executive order, the president has made an incredibly complicated system.

That’s all we know for sure. If you’re confused, that’s probably because by going through executive order, the president has made an incredibly complicated system. And this new proposal, which will attempt to include some additional reforms, will likely only make things even more complicated. In order for President Obama to create PAYE, he had to modify an existing plan that Congress had passed into law in the 1990s known as income-contingent repayment (ICR). That meant that there were now four income-based plans on the books: Old IBR, New IBR, ICR-A (also called PAYE), and ICR-B (the original ICR). In doing so, the president created multiple classes of borrowers with different terms: those with loans before 2007, those with loans after 2011, those with loans before 2014, etc. President Obama looks to be proposing the creation of a fifth plan, and with it, yet another class of borrowers operating under different terms.

As we wait for more details on the plan, here are some of our questions and guesses about the plan.

Because this proposal will have to go through negotiated rulemaking, there’s no guarantee that even the minimal details the administration has provided will come to fruition.

What will the terms be?

Because this proposal will have to go through negotiated rulemaking, there’s no guarantee that even the minimal details the administration has provided will come to fruition. But we can make some guesses about what’s likely to happen based upon the last time the Education Department conducted rulemaking to create PAYE. If the administration follows a similar approach as it did the last time, the Department will again modify the terms of ICR.

Only one such modification is clear from the White House Fact Sheet—borrower payments would be capped at 10 percent of income. But we don’t know what other changes might be made. One possible route would be to follow the proposal for changing IBR released in the president's 2015 budget request (which certainly seems likely, since the White House proposed that only a few months ago). In that plan, those who enter repayment with more than $57,500 in debt would be eligible for loan forgiveness after 25 years, while those with less than that amount would be eligible after 20 years. Those who qualify for Public Service Loan Forgiveness would still be eligible for unlimited forgiveness after 10 years, since that is statutory and cannot be changed through executive action. Finally, under original PAYE, borrowers’ monthly payments cannot exceed what their monthly payment would be under a standard 10-year amortization plan. In the new plan being proposed, it is likely that there would be no cap on monthly payments.

Who will be eligible?

The biggest unanswered question is exactly who would be eligible for this expansion. The fact sheet says the plan would make loans affordable for “all who borrowed federal direct loans as students.” This suggests it would apply to any direct loan borrower who received loans before the existing cutoff of 2007, but what about borrowers who have loans under the old Federal Family Education Loan Program (FFEL), which operated alongside the direct loan program? Most of the outstanding pre-2007 loans were made under that program.

Under PAYE, FFEL loans are eligible if the borrower consolidated, and it’s not clear why that wouldn’t be the case in this version of IBR, too. All FFEL borrowers are eligible for ICR by way of consolidation. Still, it’s odd that the White House would go out of their way to mention only Direct Loans. Should FFEL loans not be eligible, this new policy would affect few borrowers.

How much will this cost?

The administration also made various claims throughout the day yesterday as to how much this will cost, with at least one seeming to imply the proposal will save money by allowing fewer borrowers to default. But we don’t understand how that’s possible--especially since the president released the blueprint for this plan in March in his budget, and in that version, the program cost money.

When President Obama created PAYE, he paid for it through a special program to help consolidate FFEL into Direct Loans (which saves the government money because FFEL loans are relatively more expensive). It’s unclear how the administration plans to pay for this one.

Although New America has praised the administration’s proposal to curtail some of the benefits of PAYE in his fiscal year 2015 budget, this seems like a strange way to go about it. We have consistently argued for making the system less, not more, complicated. This executive order goes in the opposite direction. Imagine a borrower going to the Department of Education’s website to learn about this new plan (ICR-C, or maybe PAYE 1.1?), and being confronted with a list of five different income-based repayment plans, only some of which she is eligible for. Her monthly payment may or may not be capped. Her loan forgiveness term may be 20 or 25 years, but it only relates to how much she took out in loans if she borrowed in certain years. It’s not just the number of plans that makes things complicated—it’s the many different classes of borrowers that have been created who all face slightly different income-based plans. That said, once the borrower gets on the phone with a servicer, the servicer should (theoretically, at least) be able to provide sound guidance.

Borrowers who took out loans before 2007 already qualify for IBR, which with terms at 15 percent and 25 years, is very reasonable and affordable. Borrowers who are really struggling (i.e. have very low incomes) will pay the same under this new plan as under IBR—zero. So who exactly is this plan helping? The people it helps the most are graduate students who qualify for public service loan forgiveness. In general, it will help moderate- to high-income borrowers with debt levels of $35,000-$50,000 (moving to 10 percent is a 33 percent reduction in monthly payments, and the more money you make, the larger the nominal reduction in payments).

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Maybe that’s worth the added complexity. But it would be disingenuous for the administration to claim that this will help borrowers who are truly struggling. The President’s drive to further PAYE seems motivated just as much by politics and legacy as by sound policymaking.