The New Expansion of the “Pay As You Earn” Cap on Student Loan Payments

The essential facts on the President’s action to allow 5 million more student loan borrowers to cap payments at 10% of their monthly income.

On Monday, June 9, 2014, President Obama signed a Presidential Memorandum which directed the Secretary of Education to expand Pay As You Earn student loan repayment program to many borrowers who have until now not qualified for it. Here is what you need to know about this news.

What Present Program Does This Expand On?

Pay As You Earn (PAYE) is relatively new. It went into effect December 2012, an improvement on the Income-Based Repayment (IBR) program. Under IBR, borrowers’ monthly payments were capped at 15% of adjusted gross income, and the balance of the student loans were to be forgiven after 25 years of payments. Then with PAYE, the cap on monthly payments was reduced to only 10% of adjusted gross income, with the balance of the student loans to be forgiven after a reduced 20 years of payments.

How Does the New PAYE Expand on the Present One?

Student loan borrowers are eligible for the present PAYE repayment program only if they received federal student loans on or after October 1, 2007. The newly announced expansion is to include federal student loans received before that date. That adds about 5 million additional potential borrowers to PAYE.

What Does It Take to Qualify?

This is not yet clear. The Presidential Memorandum simply states that

the Secretary of Education shall propose regulations that will allow additional students who borrowed Federal Direct Loans to cap their Federal student loan payments at 10 percent of their income. The Secretary shall seek to target this option to those borrowers who would otherwise struggle to repay their loans.

That’s very vague language—“allow additional students”—which additional students? And “target… borrowers who would otherwise struggle to repay their loans”—how is that to be determined in practical terms?

The regulations on the repayment formula that are now in effect for the current version of PAYE generally mirror the regulations on the older Income Based Repayment (IBR) program. These formulas were based on 150% of the poverty level of income for the borrowers’ family size and state of residence.  But the Presidential Memorandum left open that the regulations for the expansion could use a different payment calculating formula, “after considering all public comments, as appropriate.”

When Will This New Expansion Go Into Effect?

Even this is somewhat open-ended. The Presidential Memorandum provides “the goal of making the repayment option available to borrowers by December 31, 2015.” The Department of Education has a year to propose the regulations, with the goal of having them be final and effective by the end of next year. Conceivably this goal could be pushed further out if the regulation-generation process takes longer. Among other things the “memorandum shall be implemented consistent with applicable law,” such as the law about how regulations are to be promulgated.

How Is This Expansion Being Paid For?

The implementation is also “subject to the availability of appropriations,” presumably the availability of money to fund the reduced payments and the eventual debt forgiveness. The Administration in prior budgets indicated that it would cost billions of dollars to expand the reduced payments program. It is not clear whether Congress would have to authorize additional spending or whether the Administration has already received funding authority.

How Can the President Expand PAYE Without Congress’ Involvement?

The Administration is asserting that it has authority to expand PAYE based on the 2010 law that allowed the creation of PAYE in the first place. The top Republican on the Senate Education Committee, Sen. Lamar Alexander, said, “I haven’t found anywhere in the law that gives him the authority to do this, and I don’t know what it costs.” The Administration’s response, by the President’s top domestic policy adviser, Cecelia Munoz, is that the program would actually save money for taxpayers by reducing defaults on student loans. Sen. Alexander’s retort was that “this needs to be dealt with by Congress, not by a… press conference at the White House.”

Related posts:

$36 Billion in Student Loans Is Owed by Americans 60 Years Old and Older Good Reason to Delay Filing Bankruptcy until Now: To Qualify for Discharging Your Student Loans Is Discharging a Student Loan Possible in Bankruptcy? Student Loans Are a Cash Cow for the Federal Government? The Basics: Student Loans in Bankruptcy