Local colleges say the key to a move by President Obama to rein in college debt is to get more students aware of the action.
Five million young Americans got good news on June 9 when the president announced an executive order expanding the Pay as You Earn program. PAYE is a voluntary college loan repayment program that limits the debtor’s monthly payments to no more than 10 percent of their discretionary income for 20 years.
The first iteration of PAYE was instituted in 2012 and was limited to students who had taken out loans through the U.S. Dept. of Education in 2008 or after. Obama’s new order extends the program for those who had incurred qualified debt prior to 2008.
If the debtor makes all of their payments during that 20-year period and still owes money, that amount is forgiven. This payback period is reduced to just 10 years if the debtor spends that time working for a government or non-profit organization. Phase II of PAYE will not be available until December 2015.
Under PAYE, discretionary income is defined as a person’s adjusted gross income as reported annually on the tax return minus $17,500 for a single person or $23,600 for a family of two. Because of this structure, there is an annual reporting requirement and the payment can fluctuate up and down based on income changes.
According to U.S. Federal Reserve Bank data, 37 million Americans owe a total of $1 trillion in college loans—an amount that is second only to home mortgages. Despite this fact, only about 1.6 million borrowers have taken advantage of the PAYE program so far.
Scott Belabrajdic, associate vice chancellor for enrollment at Southern Illinois University Edwardsville, suggested that one reason for the low participation rate is lack of knowledge about the program. There is no one that is actively promoting PAYE, he said. And, he pointed out another factor that could be throttling participation.
“Our students who have debt when they graduate average about $27,700,” Belabrajdic said. “If you’re paying that back over 20 years and capping it at 10 percent of your income, I would think most graduates are going to be making high enough incomes that they’re not going to need that 10 percent cap.”
Included in the President’s announcement was a pledge to do a better job of getting the word out through intermediaries like H&R Block to inform potential participants when doing their taxes.
Chris Hall, vice president for admission and student aide at McKendree University, said disseminating information is key.
“Part of the issue is you have to be able to promote it and get the word out,” Hall said. “You could have a great program but, if no one knows about it, it doesn’t do any good. You need people who are eligible to participate and get the benefits.”
Some people have expressed a concern that such a program is an inducement to college students to run up huge debts with the expectation of taking advantage of the 10 percent annual cap and having the government pick up the remaining tab at the end of the 20-year period. But, Lori Bode, Lindenwood University’s director of financial aid points out that there are limits on how much a student can borrow under the qualified loan programs.
“A freshman dependent student can borrow up to $3,500 subsidized and $2,000 unsubsidized for the year.” Bode said. “In total, an undergraduate, dependent student can borrower up to $31,000 or an independent student can borrow $57,500. A graduate, doctoral or professional student can borrow $138,500.”
Bode said that about 70 percent of Lindenwood students borrow for their education and the average debt upon graduation is less than $25,000. Hall reported similar figures for McKendree with 79 percent incurring debt and the average indebtedness upon graduation at $23,000. Belabrajdic said that only about 52 percent of SIUE’s last graduation class left school with debt that averaged about $27,000.
Economists have been concerned about the high student debt load and have pointed to it as a drag on the economy as young graduates struggle to buy homes and cars and make other consumer purchases.
Hall said that programs such as PAYE help after the fact but the other pieces of the puzzle are limiting the amount of debt up front and having high job placement rates for graduates.
“We have a lot of first-generation college students that attend McKendree,” said Hall. “We realize this is the first time through for a lot of these families and they need information and counseling to help make decisions about things like financial aid. When you have an 18-year-old student taking on debt, you want the family to understand what they’re agreeing to. Our financial aid office works with the students and their families so, if they take on debt, they know how much their payments will be.”
Perhaps more important, said Hall, is they also counsel against taking on debt if the student doesn’t need it.
“One key piece is not having excessive loan debt,” said Hall. “But, the other thing is through job placement. And again, that’s part of our career services. “Our faculty works really hard to make sure our students are ready to go on to the next step. Last year 97 percent of our graduates were placed within six months of graduation. Thirty percent of those students had gone on to graduate school.
“You can see this effort reflected in our loan default rate,” Hall added. “Every school monitors its loan default rate and ours is well below the national average. I think that’s because our students don’t take excessive debt; they only take out what they need; and they go out and they get jobs.”