Starting tomorrow (Friday, December 21), recent college graduates with federal student loans can apply to lower their monthly payments using the Pay As You Earn plan. This new repayment plan has a lower monthly payment cap than the more widely available Income-Based Repayment (IBR) plan. Pay As You Earn also provides forgiveness after 20 years of payments, rather than 25 years in IBR.

As with any repayment plan that allows you to pay less per month, it is possible to pay more in the long run under Pay As Your Earn or IBR due to accumulated interest. But for millions of Americans currently struggling to repay their loans, these plans ensure that payments will be manageable, help prevent delinquency and default, and provide a much-needed light at the end of the tunnel.

Countering the effects of recession

Pay As You Earn is designed to help recent students entering the job market for the first time in today’s tough economy. Only those who took out their first federal loan after September 30, 2007 and had at least one disbursement after September 30, 2011 will qualify.

The negative effects of starting your career in a down economy can last more than a decade. According to a recent study from the Economic Policy Institute:

Research shows that entering the labor market in a severe downturn can lead to reduced earnings, greater earnings instability, and more spells of unemployment over the next 10 to 15 years. […] In short, the labor market consequences of graduating in a bad economy are not just large and negative, but also long-lasting.

Earlier this year we found that two-thirds of the Class of 2011 had loans, and their average debt was $26,600 for a four-year degree. Yet half of recent college graduates are either unemployed or underemployed. Compared to students who enter the job market in better economic times, recent and soon-to-be graduates are likely to face lower earnings and higher unemployment for many years to come.

Helping lower income borrowers

Borrowers with modest incomes, who need help the most, will get significant relief from Pay As You Earn. As we noted in a recent post, a student who graduated in 2012 or later with $26,600 in federal loans and earns $25,000 a year (adjusted gross income) would pay one-third less each month in Pay As You Earn than in the current IBR plan. The same is true for a married borrower with the same debt who just completed a bachelor’s degree, has two children, and earns $45,000.

The Department of Education reports that more than 1.3 million borrowers are already enrolled in IBR, and nearly 90% of them have incomes under $50,000.

Applying made easy

A new electronic form at Studentloans.gov makes it easy to apply online for Pay As You Earn, IBR, and related repayment plans. Borrowers can even ask to be enrolled in whichever income-based plan they qualify for that has the lowest monthly payment.

Together, these plans can help millions of borrowers keep their student loan payments affordable even in tough times.

NOTE:  TICAS and its Project on Student Debt developed the policy proposal that formed the basis of IBR, which recommended forgiveness after 20 years of payments. Dozens of organizations representing students, consumers, colleges, and lenders supported the goals of that proposal. Learn more about IBR and Pay As You Earn at IBRinfo.org.

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The passage of California’s Proposition 30 last month protected both K-12 and higher education from another round of severe cuts. This good news also creates an opportunity to reflect on how state resources can best ensure access and support success for the state’s current and future college students. To that end, we've been analyzing how the Cal Grant program is serving California’s college students. See our full Cal Grant Snapshot here.

We found that for 2012-13, there was only one Competitive Cal Grant available for every seventeen eligible applicants – up from one in seven in 2006-07. (While all eligible recent high school graduates receive a Cal Grant, otherwise eligible older students and students who did not apply by the March 2nd deadline must compete for a very limited number of grants.) We also learned that only about one-quarter (23%) of very low-income students who applied for federal aid received a state grant. And for those few very low-income students who do receive a Cal Grant, the stipend to cover educational costs beyond tuition has failed to keep pace with inflation and is now at a quarter of its original value.

TICAS research director Debbie Cochrane highlighted these and other findings at the California Student Aid Commission’s strategic planning session last month. Her comments on the state of Cal Grants and where the Commission can play a unique role can be read in its entirety here.

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Recent and soon-to-be college graduates will soon have a new option to help keep their federal student loan payments manageable and avoid default—the Pay-As-You-Earn repayment plan recently finalized by the U.S. Department of Education.

Students graduating from college this year are entering the job market with record student debt and facing near record unemployment rates. Half of recent college graduates are either unemployed or underemployed—the highest share in more than a decade.  This makes the new student loan changes particularly timely.

Pay-As-You-Earn is designed to help these recent and soon-to-be college graduates, allowing them to make lower income-based monthly payments on their loans than the current Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR) plans allow.  Pay-As-You-Earn will also provide loan forgiveness after 20 years rather than 25 years of payments, allowing borrowers to more easily save for retirement and help their children pay for college.  To be eligible, borrowers must have taken out their first federal student loan after September 30, 2007 and received a loan disbursement after September 30, 2011—meaning primarily recent undergraduates.

Some have questioned how much borrowers with modest incomes will benefit from the plan.  In fact, such borrowers will receive significant relief. Here are just a couple of examples:

  • For students leaving school in 2012 or later with $26,600 in federal loan debt (the average total debt for borrowers in the Class of 2011) and earning $25,000 a year (adjusted gross income), Pay-As-You-Earn will lower their monthly payments by about one-third (from $103 to $69) compared to the current IBR plan.
  • Pay-As-You-Earn will also provide significant repayment relief to the many working adults who went back to college during the economic downturn.  A married recent graduate with two children, an adjusted gross income of $45,000, and $26,600 in federal loans will also see his or her monthly payments reduced by one-third (from $130 to $87) compared to the current IBR plan.

No one repayment plan will be the best or most affordable option for everyone, but particularly in today’s economy, many borrowers are struggling to avoid delinquency and default.  With the Class of 2012’s first student loan payments coming due starting this month, for many, Pay-As-You-Earn cannot come soon enough.

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TICAS vice president Pauline Abernathy served on a panel at the American Enterprise Institute (AEI) on September 19, 2012 . The event’s focus was on providing better information about earnings and outcomes for potential college students and their families, in the wake of increasing costs, rising student debt, and uncertainty about employment. Abernathy stressed the importance of meaningful disclosures that make sense for both students and schools, driving her points home with real-life examples.

Watch the video of Pauline illustrating ”meaningful disclosure”!


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In a victory for community college students, the Kern Community College District Trustees have postponed a vote on whether to do away with access to federal loans at Bakersfield College in California. For those who can’t otherwise afford to attend or finish school, federal student loans are the safest way to borrow.

Trustees had planned to vote on the issue yesterday, but after hearing from several concerned students, they decided to table the vote until late fall and convene a workgroup to learn more about student loans.  In making their decision, the trustees restated their commitment to promoting student success.

The Student Senate for California Community Colleges (SSCCC) recently urged all California community colleges to offer federal loans. The SSCCC, along with the California Community College Association of Student Trustees (CCCAST) and TICAS, also shared their concerns with the Kern District trustees in advance of yesterday’s meeting. Key among these concerns is that without access to federal loans, students who need to borrow must turn to riskier private loans, work excessive hours, drop courses or drop out altogether.

Today’s outcome is a great example of what can happen when students and citizens speak up about issues that concern them. We applaud the Kern trustees for seeking to better understand the issue and make the best decision for students.

While today’s development is good news for Bakersfield College students, the U.S. Department of Education can and should do more to support federal loan access at community colleges.  Colleges that pull out of the loan program often do so because they fear sanctions related to default rates.  In fact, colleges like Bakersfield College – where relatively few students borrow – are protected from these sanctions because of their low borrowing rate.

To support colleges making decisions based on fact rather than fear, it is critical that the Department:

  • urge the Bakersfield College trustees not to deny their students access to federal loans;
  • remind Bakersfield and other colleges with low borrowing rates about available appeals and clarify that they are at low risk of sanctions – or, as in Bakersfield’s case, no risk at all; and
  • highlight what colleges and servicers can do to prevent defaults and to improve their loan counseling and student success.

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On Saturday, June 30, a judge on the U.S. District Court for the District of Columbia issued a decision in APSCU v. Arne Duncan et al which challenged the Department of Education’s gainful employment regulations. Those regulations apply to career education programs at public, nonprofit and for-profits colleges and were set to go into effect on July 1.

TICAS Vice President Pauline Abernathy issued the following statement in reaction to the ruling:

The Federal District Court decision issued this weekend leaves students and taxpayers exposed to unscrupulous schools that seek to swindle them and routinely saddle students with debts they cannot repay.

However, the court decision did affirm both the Education Department’s authority to enforce the gainful employment provisions in the law and the need to do so.  The court concluded that “The Department has set out to address a serious policy problem, regulating pursuant to a reasonable interpretation of its statutory authority….Concerned about inadequate programs and unscrupulous institutions, the Department has gone looking for rats in ratholes—as the statute empowers it to do.”

The court ruled that the Department did not provide adequate rationale for picking the 35% threshold for program repayment rates, leading it to vacate the entire rule as a result.  The decision faults the rationale for the 35% threshold, not the importance of the repayment rate measure, which effectively assesses the extent to which a program’s former students are able to pay down their loan principal.  Indeed, nearly two years ago, dozens of organizations advocating for students, consumers, higher education, civil rights and college access urged the Department to raise the repayment rate threshold, writing, “This standard is simply too low to demonstrate that programs are adequately preparing students for gainful employment.”

With student debt levels rising and 30 state attorneys general from both parties jointly investigating for-profit college industry practices, the need for action has never been more urgent.  To protect students and taxpayers, we call on the Administration to swiftly respond to this court decision and on Congress to promptly adopt bipartisan legislation that prohibits any school from using taxpayer dollars to advertise and recruit students and closes the “90-10 Rule” loophole that allows schools to count GI Bill funds and Department of Defense Tuition Assistance as private rather than federal dollars.


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We submitted this letter to the editor of the Sacramento Bee in response to a June 10, 2012 opinion piece:

In Sunday’s Bee, Student Aid Commission Chair Barry Keene cited our research on college affordability ("State can cut costs without harming aid for students") but, unfortunately, misstated our findings and drew conclusions our research does not support. While many more community college students do need to be applying for federal financial aid, overall there is far less aid available for community college students than for students at other types of colleges in the state. The solution is to increase community college students’ access to financial aid, not scale it back by virtually eliminating their already limited access to Cal Grants as Keene has very troublingly suggested.

Lauren Asher President The Institute for College Access & Success

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Most community college students don’t need to take out loans to cover college costs, but for those who do, federal student loans are the safest, most affordable form of borrowing. Unlike private loans or credit cards, federal loans come with several consumer protections including fixed interest rates, Income-Based Repayment, and Public Service Loan Forgiveness.  Unfortunately, an increasing number of community colleges across the country are choosing not to offer federal loans to their students, and California stands out as the state with the greatest number of community college students – over 200,000 and growing – without access.

Too frequently, colleges make this decision based on inflated concerns about the risks of offering loans to students.  Colleges where too many borrowers default on their loans can lose eligibility to offer either loans or grants in future years, but colleges where very few students borrow in the first place – like virtually all the California Community Colleges (CCCs) – have special protections from these sanctions. (See our Cohort Default Rate Resources Page for more on what cohort default rates represent, why they matter, and individual college rates.) But many colleges – including Victor Valley College, the most recent CCC we know of to stop offering federal loans – don’t know about or understand these protections.  Given how much unmet need CCC students have, the fact that colleges are choosing to take important financing options away from students is distressing.

In recognition of the critical importance of access to federal loans, the Student Senate for California Community Colleges (SSCCC) recently passed a resolution at its Spring 2012 General Assembly to strongly support CCC student access to federal loans and urge all CCCs to make federal loans available to their students. The California Community College Association of Student Trustees felt the issue was so important that the organization took the unprecedented step of signaling their support of the resolution in advance of the SSCCC vote.  We will continue to partner with these student groups to make sure that the colleges are listening to their students, and understand their low risk of sanctions, before making decisions that undermine college affordability and success.

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In January, California Governor Jerry Brown proposed a state budget that included $300 million in cuts to the state Cal Grant program, including greatly increasing the high school grades students must have to receive grants and cutting the maximum awards at private colleges.  His updated proposal released earlier today includes modest additional cuts, which we appreciate given the extent of the budget difficulties the state is facing.  Should cuts to Cal Grants be necessary, his stated priorities for the program – protecting affordability at public colleges, focusing assistance on the neediest students, and directing dollars to colleges where students are better served – are admirable and appropriate.  The limited new cuts he is proposing, to restrict Cal Grant awards to colleges where more students graduate (at least 30%) and fewer borrowers default (no more than 15%), are well aligned with these priorities, as are some but not all of the cuts originally proposed in January.

We are disappointed that the Governor retained his earlier proposal to cut student eligibility by substantially increasing the high school grades required for Cal Grants.  Our analysis has found that this cut would disproportionately affect African-American and Latino students, leave multiple years of high school students high and dry by changing the rules mid-game, and pressure students to choose between taking challenging coursework and getting financial aid for college.  The proposal’s effect on Cal Grant B awards in particular is so extreme that more than four in 10 currently eligible applicants would no longer get the grants they’ve been counting on for this fall.  Even the Legislative Analyst’s Office, which has previously raised questions about appropriate GPA requirements for Cal Grants, believes the Governor’s proposal is too harsh and abrupt.

Importantly, the Governor also proposed other major changes to the way Cal Grant eligibility and award levels are determined, although details are still forthcoming. (UPDATE: Here is the quick analysis we did once details of the Governor’s proposal became available.) While not technically cuts for the 2012-13 year, these changes have the potential to dramatically alter the course of the Cal Grant program.  Currently, Cal Grants are “all-or-nothing” grants, provided to students who fall below income and asset ceilings.  To understand what this means, consider a student from a family of four attending the University of California.  Whether her family income is $40,000 or $80,000, she gets a flat Cal Grant worth more than $13,000 – but nothing if her family income is $81,000.  Whether or not this is the most efficient and equitable way to deliver Cal Grant dollars, and whether there are alternatives worth considering, are reasonable policy questions.  However, these questions require more than a couple of weeks to address, as the answers could fundamentally change the structure of the program and how effectively it supports both access and success.  Hasty decisions could lead to harsh and unintended consequences for the state’s students and families for many years to come.

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