How Obama's College Cost Plan Could Affect Student Borrowers

Equal Justice Works
September 4, 2013

The White House released its plan to make college more affordable last month. It's ambitious, bound to be controversial, especially among colleges, and many of its key provisions will require Congressional action, which is never a given these days.

Nonetheless, it's an important step that will help shape the debate over postsecondary education for the near future. Here's a brief overview that focuses on the issues most germane to student debt along with the Student Loan Ranger's gut reaction.

The president's proposal ends with allowing all borrowers to enroll in Pay As You Earn, the new income-driven repayment plan that caps payments at 10 percent of a borrower's income and provides for forgiveness after 20 years. Currently only "new borrowers" - those who borrowed their first federal loan on or after Oct. 1, 2007 and received a new loan on or after Oct. 1, 2011 - are eligible for the plan. This is a much needed step forward, but it will require Congress to take action.

[Get tips and advice on navigating the maze of student loan options.]

A step that does not require Congress is ensuring borrowers know that income-driven repayment plans, including Pay As You Earn, are available to help them. The president is directing the Department of Education to contact struggling borrowers and undergraduates with high amounts of debt this fall to "ensure they have the information they need to choose the right repayment option for them," according to a summary of the proposal on the White House website.

Under the president's plan, the U.S. Department of Education and the Department of the Treasury will team up in 2014 to inform borrowers about those plans as they file their taxes. This will be very helpful for borrowers. Despite a constant rise in deferment, forbearance, delinquency and default rates that indicate growing borrower distress, slightly less than 7 percent of borrowers are currently enrolled in income-driven repayment plans, which provide a buffer if they suffer a decline in income or lose their jobs.

As we've noted before, women and minorities are hardest hit by student debt, so it's good to see the president taking some action on that front as well. Pell Grants are reserved for low-income students, many of whom are women and minorities. With elite colleges failing to enroll more Pell students over the past five years, we think the legislation the president is calling for to provide colleges with bonuses for graduating - and we stress graduating - Pell students is a great idea.

[Learn how to get a great financial aid package.]

We're not so sure about the idea outlined in the proposal of "requiring colleges with high dropout rates to disburse student aid over the course of the semester as students face expenses, rather than in a lump sum at the beginning of the semester." We understand this would help ensure that students who drop out during a semester do not receive Pell Grants for time they are not in school, but the fact is that lower-income students often face unexpected financial challenges.

Requiring them to wait for aid could backfire by exacerbating those challenges and causing higher dropout rates. And punishing students for colleges' failures seems unfair as well. We would prefer a proposal that would directly target low-performing schools by, for example, lowering their new College Scorecard rating.

[Understand recent changes to financial aid.]

This proposal to develop a new college ratings system before 2015 and then to use it as a basis for awarding federal aid in 2018 - assuming Congress will pass legislation authorizing the latter - is the most controversial aspect of the president's proposal and the one students and parents probably will hear the most about. The new rating system can be implemented by the Department of Education, so we will undoubtedly be writing more about it as the details are hashed out.

But the Student Loan Ranger likes the idea of students being able to compare colleges easily, and the proposal at least indicates that the president is aware of the necessity of dealing with some of the tough issues, including grouping colleges with similar missions, identifying the colleges that do the most to help students from disadvantaged backgrounds, promoting access and affordability and finding ways to measure both graduation and transfer rates.

Since it will require Congressional action and is not even theoretically slated to take effect until 2018, we'll largely leave the idea of using the ratings to award federal aid alone. But we do want to say that the idea that, as stated in the summary, "students attending high-performing colleges could receive larger Pell Grants and more affordable student loans," again strikes us as punishing students for the school's failures. When Congress takes up this idea, the Student Loan Ranger hopes they'll look for alternative ways to spur schools to perform better.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.