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Asset Building News Week, October 22-26

October 26, 2012
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The Asset Building News Week is a weekly Friday feature on The Ladder, the Asset Building Program blog, designed to help readers keep up with news and developments in the asset building field. This week's topics include wealth and income inequality, housing, and financial education.

Answer Me This...

October 25, 2012

With the last of the three debates completed and the presidential election just around the corner, the New America Foundation has pulled together this video with people from our various policy teams to ask the candidates a few final questions about how they plan to govern. Check us out, tell us what you think, and if you seeeither candidate answering any of the questions, let us know--tweet to us at @NewHealthDialog and @NewAmerica!

College Board Report Shows Fertile Ground for Deficit Reduction in Tax Credits

October 25, 2012

This week, The College Board released its annual Trends in College Pricing and Trends in Student Aid reports for the 2012-13 school year. This year, the headline of the reports has been that 2012-13 in-state tuition at public four-year colleges rose from last year’s tuition levels at a slower rate than it did in the previous two years. (Even that comparison fails to note the real news, though, that tuition rose by more than three times inflation this year. See this post from our sister blog, Higher Ed Watch, for more.)

Given that lawmakers are sure to plunge into a deficit-cutting frenzy after the November elections to avoid the across-the-board spending cuts set to take effect in January, the Student Aid report buries a key development in student aid trends. In 2010 (the most recent year for which data are available), the federal government spent some $3.5 billion more on education tax credits than the year before – a rapid rate of growth.

These so-called tax expenditures are a rarely noted, but highly significant, part of federal education spending, particularly for higher education. They go largely unnoticed in education funding debates because they don’t look like spending to the untrained eye. But in every way that matters, they are just like spending on Pell Grants or student loans. Yes, education tax benefits provide savings to families, but in the form of foregone tax revenue for the federal government. Therefore, they factor into the federal balance sheet as a cost, even though they’re less visible to policymakers and the public than appropriations.

So what’s behind the big increase in this form of federal education funding? For one, the American Opportunity Tax Credit (AOTC). This new benefit was created in the 2009 stimulus bill to provide additional tax relief to middle-income and lower-income families and policymakers extended it beyond its original expiration date to the end of the 2012 calendar year. Meanwhile, the Hope credit, a smaller credit that includes more income restrictions, was suspended until the AOTC expires.  According to the report, the total amount of tax credits and deductions before the AOTC took effect was $7 billion (adjusted for inflation). After, it jumped to $15.4 billion. By 2010 it had climbed to $18.8 billion.

The Trends in Student aid report also shows that, when those who claim the AOTC are mapped by their adjusted gross income (AGI refers to total income minus pre-tax benefits like health insurance premiums or 401k contributions), a substantial portion of the dollar total – 23 percent – went to families with incomes over $100,000. Meanwhile, only 24 percent went to low-income families with an AGI below $25,000.  Even worse, only 3 percent of the 1.2 families who claimed the tuition and fees deduction in 2010 (down from 3.0 million in 2008) were those low-income families.

When the dust settles from the elections next month, Congress will return for a quick session to finish out the year before the newly-elected members of Congress take their seats.  At the top of the agenda are two urgent items: extending the tax expenditures already in place before the expire at the end of the calendar year, and resolving the 8.2 percent across-the-board discretionary spending cuts before they take effect on January 2, 2013.  Millions of families reap substantial savings from the credits and deductions available to them, and changes to the expenditures might be unpopular. But the College Board report shows what many in Congress already recognize: The tax expenditures for education and other fields are big-ticket items on par with regular appropriations, and are benefiting families that could hardly be described as needy. That makes them ripe for the kind of large-scale deficit reduction Congress needs to reach a compromise.

New America’s Recommendations for a Better Income-Based Repayment Plan

October 22, 2012

Last week, the New America Foundation released the policy paper Safety Net or Windfall?: Examining Changes to Income-Based Repayment for Federal Student Loans, which demonstrates that the Obama Administration’s pending changes to the Income-Based Repayment plan for federal student loans, called Pay As You Earn (PAYE), will provide windfall benefits to high-debt, high-income borrowers and could allow graduate and professional schools to raise tuition with impunity. The report also recommends that the Obama Administration make a few tweaks to its proposed changes to IBR before the regulations become final in the coming weeks.

If the Administration allows the pending regulations to take effect without addressing the benefits that the plan will provide for high-debt borrowers, it could jeopardize the integrity of the IBR plan. Even though the IBR plan provides important benefits to struggling, lower-income borrowers, the media and the public may come to view the entire IBR as just another way that government programs are rigged to help the most well-off rather than the most needy.

New America’s Recommendations for a Better Income-Based Repayment Plan

October 22, 2012

Last week, the New America Foundation released the policy paper Safety Net or Windfall?: Examining Changes to Income-Based Repayment for Federal Student Loans, which demonstrates that the Obama Administration’s pending changes to the Income-Based Repayment plan for federal student loans, called Pay As You Earn (PAYE), will provide windfall benefits to high-debt, high-income borrowers and could allow graduate and professional schools to raise tuition with impunity. The report also recommends that the Obama Administration make a few tweaks to its proposed changes to IBR before the regulations become final in the coming weeks.

If the Administration allows the pending regulations to take effect without addressing the benefits that the plan will provide for high-debt borrowers, it could jeopardize the integrity of the IBR plan. Even though the IBR plan provides important benefits to struggling, lower-income borrowers, the media and the public may come to view the entire IBR as just another way that government programs are rigged to help the most well-off rather than the most needy.  

Below are the common-sense recommendations from the recently-released New America Foundation paper. The Obama Administration should adopt these recommendations as an easy way to fix the windfall benefits and perverse incentives in the pending IBR regulations.  

Recommendation #1: Maintain the lower payment calculation (10 percent of AGI) in New IBR, but only for borrowers with AGIs at or below 300 percent of the federal poverty guidelines ($33,510 for a household size of one). Borrowers with AGIs above 300 percent will pay according to the Old IBR formula (15 percent of AGI).

Justification: This change targets the benefits of lower monthly payments under New IBR to lower-income borrowers only. Borrowers earning more, while still eligible for IBR, must make payments based on the Old IBR formula. While the savings that New IBR provides to lower-income borrowers are less than they are for higher-income borrowers, this recommendation would still allow borrowers who are the most likely to struggle to make payments with the added relief offered by New IBR. Additionally, by requiring borrowers with incomes above 300 percent of the federal poverty guidelines to make monthly payments based on 15 percent of their AGIs, it is much less likely that high-income borrowers will receive loan forgiveness. It also allows borrowers with lower incomes to benefit from the 10 percent rate that New IBR offers, but ensures that they will repay those benefits by paying at a higher rate if their incomes increase later.

Lastly, those borrowers with AGIs above 300 percent of the poverty guidelines will likely have total incomes that are markedly higher than their AGIs because they are able to make pre-tax benefit payments, contribute to retirement savings, and take larger above-the-line deductions. Imposing a higher payment calculation (15 percent of AGI) on these borrowers compensates for their significantly lower AGIs relative to their total salaries.

Recommendation #2: Maintain the loan forgiveness threshold from New IBR (20 years), but only for borrowers whose loan balances when they entered repayment do not exceed $40,000. Borrowers with higher initial balances would qualify for loan forgiveness after 25 years of repayment, the same as under Old IBR.

Justification: Like the first recommendation, this proposal would maintain the more generous benefits of New IBR, but not for all borrowers. A two-tiered loan forgiveness system based on initial debt levels would keep the 20-year loan forgiveness targeted toward borrowers who have debt from undergraduate studies or moderate amounts of debt from graduate studies and who struggle to repay. By creating a longer loan forgiveness threshold for borrowers with debt levels above $40,000, this recommendation also reduces the tendency that New IBR has to provide loan forgiveness to high-income, high-debt borrowers when they are most able to make higher payments on their loans for a total of 25 years. This two-tiered approach would discourage graduate and professional schools that charge high tuitions and their students who borrow federal loans from using IBR as an indemnification tool.

Recommendation #3: Eliminate the maximum payment cap. Borrowers must always pay based on the IBR income formulas, no matter how high their incomes are. Additionally, borrowers may not opt to enroll in another repayment plan once enrolled in IBR.*

Justification: The maximum payment cap targets IBR benefits to higher-income borrowers either by reducing their monthly payments, increasing the amount of loan forgiveness they receive, or both. It can also increase the chances that a borrower earning a very high income (over $200,000) would qualify for loan forgiveness. Lastly, requiring that borrowers stay in IBR for the duration of their repayment term once they enroll will ensure that borrowers who used IBR when their incomes were low will pay commensurately higher payments should their incomes increase—this helps offset some of the initial costs the government incurred when the borrowers benefitted from low payments while their incomes were lower.

Recommendation #4: The U.S. Department of Education and policymakers should be forthcoming about the negative consequences borrowers may face when repaying through IBR. The Department should promote the consolidation repayment option as another alternative that borrowers have to reduce their monthly payments and extend their repayment terms, particularly given how similar IBR is to the consolidation repayment plans for many types of borrowers. The Department should provide borrowers with illustrative examples of how paying off their loans more slowly could increase what they pay and provide clear warnings. Private companies servicing federal student loans should clearly indicate to borrowers how much interest accrues on their loans when they repay through IBR and how that is likely to increase the repayment term and total interest costs they will pay. Policymakers should also make consolidation less onerous for borrowers; currently, it requires significant paperwork and effort to enroll.

Justification: Some policymakers and student aid advocates have promoted IBR with hardly a mention of the financial risks it poses for borrowers (those risks exist for Old IBR, the only plan in which borrowers have enrolled to date, though New IBR entails far less financial risk for borrowers with debt levels that exceed $20,000). Borrowers may save little per month under IBR and end up paying more and for longer due to the added interest costs. Borrowers do make a trade-off in choosing IBR over other repayment options, and loan servicers and the U.S. Department of Education should ensure that borrowers are informed of those trade-offs. 

Recommendation #5: IBR payments for a borrower who is married but files a separate income tax return should be based on the household’s combined AGI. The program currently allows borrowers to file separate income tax returns and use only the borrower’s income to calculate payments under IBR. This policy should include an exception for cases where both spouses are making payments on federal student loans under IBR. In that case, each borrower’s loan payments should be based on one-half of household income.

Justification: Married borrowers with low individual, but high household incomes can still qualify for IBR (including loan forgiveness) by filing a separate income tax return. If these borrowers also have children, they can significantly increase the benefits they earn under IBR by claiming the children as dependents on their own federal income tax returns since it increases their household size and the poverty exemption they receive under IBR.** This provision is another way in which higher-income borrowers (based on household income) can qualify for generous benefits under IBR. Ending this provision will ensure that the program’s benefits are targeted to borrowers who need the most assistance. The exception for couples in which each spouse is repaying a federal student loan will ensure that borrowers in a two-borrower household do not each have to make payments on their loans on their combined incomes—which would essentially be double-counting their incomes.

Recommendation #6: Make loan forgiveness tax-free using budgetary savings that arise from the other recommendations outlined above.

Justification: Federal tax law treats loan forgiveness under IBR (except when provided for public service employees) as taxable income. Borrowers who receive loan forgiveness (under an IBR that reflects the recommendations outlined here) will likely have experienced some degree of financial hardship. Therefore, they are also likely to struggle with what could be a relatively large tax bill in the year they receive loan forgiveness. If IBR is meant to aid this type of borrower, then it should not impose its own type of financial burden on them.

Recommendation #7: Allow all borrowers to enroll in an IBR that reflects these recommendations. Do not limit it to new borrowers. Use the savings that would arise if policymakers implemented all of the recommendations listed above to offset the incremental costs of this recommendation.

Justification: Old IBR is available to all borrowers, but Congress and the Obama administration have limited access to New IBR to more recent borrowers to reduce the cost of the program. The recommendations outlined above would preserve some of the benefits of New IBR, but target them to those borrowers with more financial need, thereby reducing the cost. The recommendations would further reduce costs by limiting benefits to higher-income borrowers compared to even Old IBR. Therefore, policymakers c­­ould open the program to all borrowers at little or no incremental cost to taxpayers, and a greater number of borrowers would gain access to lower repayments and earlier loan forgiveness.



*The recommended IBR would capitalize a borrower’s accrued unpaid interest once his payments under IBR exceed what he would be required to pay under the standard 10-year repayment plan based on his original loan balance. This is consistent with the practice currently under both Old and New IBR.

**Note that a borrower repaying through IBR need not claim a child as a dependent on his or her tax return in order to have the child included in his or her household size under the IBR payment calculation. The borrower must simply designate the child as a dependent on the IBR application annually, regardless of who claims the child as dependent for purposes of federal income taxes. The New America Foundation paper incorrectly asserts that the two are one in the same when they are not. This error does not affect our findings. We regret the error.

New America’s Recommendations for a Better Income-Based Repayment Plan

October 22, 2012

By Alex Holt, Jason Delisle
This post originally appeared on Ed Money Watch.

Last week, the New America Foundation released the policy paper Safety Net or Windfall?: Examining Changes to Income-Based Repayment for Federal Student Loans, which demonstrates that the Obama Administration’s pending changes to the Income-Based Repayment plan for federal student loans, called Pay As You Earn (PAYE), will provide windfall benefits to high-debt, high-income borrowers and could allow graduate and professional schools to raise tuition with impunity. The report also recommends that the Obama Administration make a few tweaks to its proposed changes to IBR before the regulations become final in the coming weeks.

If the Administration allows the pending regulations to take effect without addressing the benefits that the plan will provide for high-debt borrowers, it could jeopardize the integrity of the IBR plan. Even though the IBR plan provides important benefits to struggling, lower-income borrowers, the media and the public may come to view the entire IBR as just another way that government programs are rigged to help the most well-off rather than the most needy.  

Below are the common-sense recommendations from the recently-released New America Foundation paper. The Obama Administration should adopt these recommendations as an easy way to fix the windfall benefits and perverse incentives in the pending IBR regulations.

Jason Delisle Featured on Yahoo Finance: Obama's Student Loan Program Is a Windfall for the Rich

October 19, 2012

This week, the Federal Education Budget Project, Ed Money Watch's parent initiative, released a report that shows how the Obama Administration's proposed changes to Income-Based Repayment (a federal student loan repayment plan designed to help struggling borrowers) will offer the biggest increase in benefits to high-debt graduates -- even once their incomes rise to six figures. Director of the Federal Education Budget Project and co-author of the report Jason Delisle sat down with Yahoo! Finance's Aaron Task this week to explain the key points of the paper, and to review how the Administration can fix the program before the pending changes even take effect. The video is embedded below.

The full report, Safety Net or Windfall?: Examining Changes to Income-Based Repayment for Federal Student Loans, is available here, and the calculator we designed and used to test the program is also available to download (for more about the calculator click here). 

New Paper Highlights Perverse Benefits of New Income-Based Repayment Formula

October 16, 2012

In today’s tough economy, many recent college graduates are looking for ways to shrink their federal student loan payments. Income-Based Repayment (IBR), which allows students to pay a monthly amount based on their earnings, not their federal student loan balances, provides significant relief. However, a new report, Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans, from the Federal Education Budget Project (our sister blog Ed Money Watch's parent initiative) shows that pending changes to IBR are far more generous than previously thought. Borrowers with high student loan balances and high incomes, not low-income borrowers, stand to benefit the most.

Congress created IBR in 2007 to make it easier for college graduates to make their student loan payments even in their first years out of school when they are earning lower incomes. If a student’s monthly payment under standard repayment exceeds 15 percent of his monthly discretionary income, he is eligible for the program. The borrower’s monthly payments increase as his salary increases until they reach a cap at the level he would have paid under standard repayment. After that borrower makes 25 years of payments in IBR, the Department of Education forgives any remaining loan balance.

But in 2010, at President Obama’s request, Congress made the program even more generous. The new IBR will base monthly payments on 10 percent of discretionary income, instead of 15, and loan forgiveness will be provided after only 20 years. That change was set to take effect in 2014 until the Department of Education, as part of the president’s “We Can’t Wait” initiative to circumvent legislative gridlock, sped up the availability of the new IBR by creating a version of it through regulations – “Pay As You Earn” (PAYE). PAYE will take effect by the end of the year.

But little is known about the real effects of this new IBR system. To fill in this knowledge gap, FEBP Director Jason Delisle and Program Associate Alex Holt designed and built a calculator that estimates the monthly payments a borrower will make under the original IBR, the pending version of IBR, and other repayment plans like standard 10-year and consolidation. It accounts for a borrower’s loan balance, interest rate, income, and family size over the entire repayment period. It also calculates the total payments over the life of the loan, and the amount of loan forgiveness he will receive.

New Paper Highlights Perverse Benefits of New Income-Based Repayment Formula

October 15, 2012
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In today’s tough economy, many recent college graduates are looking for ways to shrink their federal student loan payments. Income-Based Repayment (IBR), which allows students to pay a monthly amount based on their earnings, not their federal student loan balances, provides significant relief. However, a new report, Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans, from the Federal Education Budget Project (Ed Money Watch's parent initiative) shows that pending changes to IBR are far more generous than previously thought. Borrowers with high student loan balances and high incomes, not low-income borrowers, stand to benefit the most.

Congress created IBR in 2007 to make it easier for college graduates to make their student loan payments even in their first years out of school when they are earning lower incomes. If a student’s monthly payment under standard repayment exceeds 15 percent of his monthly discretionary income, he is eligible for the program. The borrower’s monthly payments increase as his salary increases until they reach a cap at the level he would have paid under standard repayment. After that borrower makes 25 years of payments in IBR, the Department of Education forgives any remaining loan balance.

But in 2010, at President Obama’s request, Congress made the program even more generous. The new IBR will base monthly payments on 10 percent of discretionary income, instead of 15, and loan forgiveness will be provided after only 20 years. That change was set to take effect in 2014 until the Department of Education, as part of the president’s “We Can’t Wait” initiative to circumvent legislative gridlock, sped up the availability of the new IBR by creating a version of it through regulations – “Pay As You Earn” (PAYE). PAYE will take effect by the end of the year.

But little is known about the real effects of this new IBR system. To fill in this knowledge gap, FEBP Director Jason Delisle and Program Associate Alex Holt designed and built a calculator that estimates the monthly payments a borrower will make under the original IBR, the pending version of IBR, and other repayment plans like standard 10-year and consolidation. It accounts for a borrower’s loan balance, interest rate, income, and family size over the entire repayment period. It also calculates the total payments over the life of the loan, and the amount of loan forgiveness he will receive.

The calculator revealed some surprising results. PAYE (the plan that is virtually identical to the 2014 10 percent, 20-year IBR) doesn’t necessarily target the greatest benefits to struggling borrowers. Because low-income borrowers have so little discretionary income above the poverty exemption applied annually, the new IBR only lowers their monthly payments by as little as $5 and at most $20 compared to the original IBR.

Instead, borrowers with high federal student loan balances at graduation – think law students or graduate students, since undergraduates face annual and aggregate limits on the amount they can borrow – reap the most benefit. When their incomes are low, they are able to pay manageable amounts. But as their incomes rise, their monthly payments are capped at the standard repayment amount, meaning they actually derive more benefit from IBR as they become wealthier. Plus, these borrowers often qualify for loan forgiveness after only 20 years; according to the calculator, borrowers above certain debt levels may not even pay down the interest they owe over 20 years, let alone the principal. This is a much greater benefit than is offered through the consolidation repayment plan, in which borrowers with debt totaling more than $40,000 repay their loans in full over 25 or even 30 years. And since IBR allows graduate school borrowers to take out such high loan balances with few concerns, schools have no reason to lower tuition – in fact, they have an enticement to raise it.

The report’s authors offer recommendations for changes to the PAYE/new IBR plans based on these findings. The IBR changes haven’t taken effect yet, which means there’s still time to restructure the program so it targets benefits to those who need them most. In an era of limited resources, we can’t afford to provide payouts to the rich while leaving struggling students languishing in debt.

To read the paper, click here. To try your hand at the IBR calculator, click here.

New America Releases Income-Based Repayment Calculator For Forthcoming Report

October 12, 2012

Update: New America has released Saftey Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans. The paper can be accessed here.

Next week, the New America Foundation will release a paper examining pending changes to the Income-Based Repayment (IBR) program for federal student loans. Today, we are releasing the calculator we used to develop our findings.

The pending changes to IBR are the result of an Obama administration proposal to change the federal student loan program’s existing Income-Based Repayment (IBR) plan—which caps borrowers’ payments at 15 percent of their incomes and forgives any remaining debt after 25 years of payments—by reducing payments to 10 percent of a borrower’s income and providing loan forgiveness after 20 years of payments. Congress enacted this proposal two months after the President proposed it in his 2010 State of the Union address, but limited it to students who take out their first loans on July 1, 2014 or later. Anxious to deliver those benefits sooner, the Obama administration announced last year that it would instead make the plan available as early as this year—to borrowers who took out their first student loans in 2008 or later and borrowed at least one loan in 2012 or later. The final regulations are still pending.

To date, policymakers and advocates have provided little information about the benefits that the impending changes to IBR will provide to borrowers with different income and debt profiles over their entire repayment terms...

Read the full post on Ed Money Watch.

 

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