Student loan attorney Joshua Cohen (@studentloanlaw) writes an excellent critique of the Obama administration’s new executive order to lower student loan payments. The order will extend eligibility for the Pay-As-You-Go (PAYE) program that was previously only available to students who started borrowing after 2007 and who took out a new loan after 2011. Those time restrictions are now lifted. The extension is scheduled to go into effect at the end of 2015.
This is not a solution, it is a bandage. It doesn’t make college more affordable. It doesn’t cap maximum loan amounts. It doesn’t create underwriting standards. It doesn’t return bankruptcy or other consumer protections to federal student loans. It doesn’t address the private student loan debacle (you know, the loans that supposedly have underwriting standards that allow an 18 to 22 year old to rack up $100,000 in debt with no credit history, ropes in a relative as a co-signer, offers no flexible repayment terms, and is also exempt from discharge in bankruptcy? The real killer of the economy in my opinion). It doesn’t even apply to all federal student loans (Parent PLUS loans are not eligible)! This is, at best, a baby step forward.
Cohen makes several strong points.
- There is no maximum cap on student loans. Schools and banks may pile on as much debt as they want without any underwriting standards at all. There needs to be some minimal connection between the amount being borrowed and the ability to repay the debt. Yes, we want to give all Americans the chance to improve themselves through education, but at some point there has to be a limit and an underwriting standard.
- Private Student Loan Nightmare. Prior to the Bankruptcy Reform act of 2005, Private Student Loans were dischargeable in bankruptcy. Since 2005 banks have dramatically increased the amount of private student loans made and, unlike Federal student loans, private loans do not have income based repayment plans. The level of frustration experienced by borrowers seeking to repay these debts is extremely high.
- Parent PLUS Loans not eligible for the new plan. The number of parents I see with student loan debt is amazing these days. Folks who should be saving for retirement are commonly holding $50,000 or more of parent loans whose children graduate from college only to obtain a $10 per hour job.
- These loans are having a dramatic impact on our economy by crowding out other forms of borrowing, such as mortgage loans, car loans and other loans that trigger economic activity. Young graduates are overly burdened by loans that prevent them from buying homes, starting businesses and families. Is this good for America?
Student loan debt now exceeds $1.2 trillion and this figure is projected to increase steadily in the next decade.