Department of Education: rules to change for student borrowing

In December, Pitt alumni with federal student loans will be able to make lower monthly payments.

The U.S. Department of Education announced on Oct. 27 two new sets of rules which will protect college students from unfair banking fees and keep graduates out of financial messes.

“These regulations will help make sure student loan debt is affordable for all borrowers and bring overdue reforms to campus cards, a sector that too often puts taxpayer dollars and student consumers at risk,” Secretary of Education Arne Duncan said in a statement.

One set of regulations involves revisions to the current Pay as You Earn student loan repayment plan, in which the amount the debtor pays each month is a percentage of his or her income.

The revision, which the Department of Education is calling the Revised Pay as You Earn Plan, will allow more Americans with loan debt to pay less each month. The REPAYE plan will be available beginning in December to anyone with federal student loans.

College graduates who enroll in the REPAYE plan to pay off their loans will have to pay 10 percent of their discretionary income every month. If debtors have not paid their loans after 20 years, the government will forgive their debts, unless the person borrowed for graduate school or professional school. Those borrowers will have to pay their debts for 25 years.

Previously, the DOE restricted the PAYE plans to low income individuals. According to the DOE’s report, six million more Americans with federal loan debt will now have access to a PAYE repayment plan.

Student loan expert Mark Kantrowitz said although REPAYE extends relatively generous terms to more people,  lower payments still mean the original PAYE plan is more forgiving.

“The [PAYE] plan has the lowest monthly payment and the best repayment terms,” Kantrowitz said in an email. “But, not everybody is eligible for it. All borrowers are eligible for the [Income-Based Repayment] and [REPAYE] plans.”

According to the DOE’s College Scorecard, 55 percent of Pitt students receive federal loans, resulting in a typical total debt of $26,897. Ninety percent of Pitt graduates with federal loan debt begin paying off that debt within three years of graduation, a significantly higher number than the national average of 67 percent.

Pitt spokesperson John Fedele said data showing how many Pitt graduates use the PAYE plan to repay their loans was not readily available.

Kantrowitz said there are also pros and cons to the first set of regulations regarding the REPAYE plan.

For example, the monthly payment under REPAYE can increase without limit if the debtor earns enough income.

On the other hand, Kantrowitz said, the maximum monthly payment under REPAYE, which takes 10 percent of the debtor’s discretionary income, is lower than other plans like the Income Based Repayment Plan, which takes 15 percent.

According to Kantrowitz, REPAYE adds a level of convolution to the federal student loan bureaucracy.

“A key problem with [REPAYE] is the greater complexity of the repayment plan makes it harder for borrowers to calculate their monthly loan payments,” Kantrowitz said. “By introducing the [REPAYE] plan, instead of eliminating the eligibility restrictions on the [PAYE] plan, the U.S. Department of Education has made an already complicated set of repayment plans even more confusing.”

The second set of regulations opens up how students can receive their credit balances— the money left over when they have more federal student loans than they owe in tuition.

According to the DOE’s report, some colleges and financial institutions implied that students can only receive their credit balance in special purpose accounts, sometimes tied to college-logo branded prepaid or debit cards.

After aid recipients opened accounts, some account providers “charged onerous, confusing, or unavoidable fees in order to access their student aid funds,” according to the DOE report. The report said these practices “indicate that many institutions have shifted costs of administering [student loan] programs from institutions to students.”

The new rules will allow for students to receive their credit balances in their already existing bank accounts, and will also ban banks from charging student account holders overdraft charges or other fees on their college-branded cards and require them to provide access to surcharge-free ATMs.

Because Pitt never used any of the tactics the report describes, Fedele said these new regulations won’t affect Pitt in any way.

David Pommerehn, vice president of the Consumer Bankers Association, a trade group based in Washington D.C., also said the new regulations are unnecessary.

“We feel that we’ve done a very fine job of providing thousands and thousands of students with accounts that are safe, cheap and effective for them to use,” Pommerehn said.

Pommerehn said the DOE did not define some of the phrases in the regulations, such as “best interest of the student” and “reasonable access.” He said these terms’ vagueness could put banks at risk of lawsuits for failure to comply.

On the other hand, the U.S. Public Interest Research Group, a consumer group founded by Ralph Nader and based in Boston, issued a statement hailing the new regulations as a victory for student protections.

“Students are unfairly targeted by banks, and the Department of Education rule levels the playing field,” Christine Lindstrom, U.S. Public Interest Research Group’s higher education program director, said in the statement on its website.