The president announced Monday the expansion of 2010’s “Pay as You Earn” program that caps some graduates’ repayments at 10% of their monthly discretionary income. The executive order increases eligibility of the program to include those who took out loans before October 2007 or stopped borrowing by October 2011, a move the White House says will expand payment relief to nearly five million people.
The government determines discretionary income by subtracting 150% of the poverty level from an individual’s total income, explains Mark Kantrowitz, senior vice president and publisher of Edvisors Network. “The idea is that it accounts for money you have no real choice of how to spend. It goes to paying for basic living expenses. It’s a rough cut, but a reasonable approximation.”
The reprieve goes into effect December 2015.
“In a 21st Century economy, a higher education is the single best investment that you can make in yourselves and your future. And we’ve got to make sure that investment pays off,” the president said Monday.
The federal government offers different repayment plans to help cash-strapped borrowers, including income-based repayments, the graduated repayment program, and forgiveness programs for on-time payments and public-sector employees.
Under many of the plans, low-income borrowers can have their balance canceled after 25 years of on-time payments. The president’s plan moves the forgiveness date to 20 years or 10 years for those in public service jobs.
“It will slightly increase the amount of debt that is forgiven, but it’s not going to be enough to stimulate the economy,” says Kantrowitz. “If the government were to forgo all student loan debt immediately, it would have a 0.4% impact on the GPD. It wouldn’t really move the economy.”
