‘Worsen Things’
The income-based repayment programs don’t encourage people to seek higher-paying jobs or major in the fields that lead to better salaries, Vedder said. The administration’s measures will alleviate “some of the problems that currently exist with the system, but will actually worsen things in the long run.”
The issue has wider consequences for the economy. Students who default suffer damage to their credit records, making it harder for them to borrow for homes and cars in the future. That weighs on growth.
Default rates on student debt increased to 14.7 percent for students required to start repayment in 2010, the most recent data available, according to Education Department figures. That’s up from 13.4 percent a year before.
“As a steward of the federal government’s finances and of the American economy, the Treasury Department has a strong interest in making sure we are asking the right questions,” Raskin said in her first public speech as a Treasury official on April 29.
Deferring Payments
The Education Department’s income-based plans aren’t used very widely, with many borrowers opting instead for payment deferral plans when money gets tight or the job hunt drags on. Interest accrues during most deferrals or forbearance, further hindering the borrower.
About one-fourth of outstanding direct federal loans is being paid back through one of three income-based programs, according to the data on Education Department’s website. The percentage doesn’t include students who borrowed before 2010, when federal loans were originated by private lenders.
Education Department spokeswoman Denise Horn said the department’s goal is to help students “make informed decisions that are most appropriate for their financial circumstances.” The department and the loan servicers it contracts with “continue to reach out to borrowers through e-mail, phone calls and social media to talk about repayment options,” she said.
President Barack Obama also asked the Treasury and Education departments to develop and start by Sept. 30 a pilot project to test the effectiveness of loan counseling resources.