The NY Times reports that although the federal government’s recently-expanded income-based repayment program is more affordable for some students, it may come with a hefty, and unexpected tax burden. The federal government will generally forgive whatever loans are left after 10 to 25 years of income-based payments; however, unless you attend a program for teachers or take a job in public service, you will have to pay income taxes on that forgiven debt. For someone who attended graduate or professional school and racked up six-figures of debt, the tax could easily be five-figures and, perhaps most worrisome, would be due immediately.
So, how many people could have to face this formidable tax and what would it amount to for the average borrower? The Education Department estimates that approximately two million people had applied for income-based repayment as of Oct. 31. About 1.3 million of those applicants qualified for reduced payment, another 440,000 applications were still pending. According to the article, “400,000 borrowers from 2012 through 2021, each with a beginning average loan balance of about $39,500, would each eventually receive loan forgiveness of about $41,000.” The amount forgiven can be larger than the original balance because of accrued interest payments. Depending on your tax bracket, the federal tax on $41,000 of forgiven loans could amount to over $10,000 and, if you live in a state with income taxes, you’d need to deal with those as well.
That said, since $41,000 is more than double what is given to the average Pell recipient over four-years, a $10,000 tax payment could be considered fair. The New America Foundation and others have argued that the new repayment program provides only marginal benefits to low-income borrowers, but “generous benefits to borrowers with higher federal loan balances” who have the potential to earn high incomes later on. As The Quick and the Ed notes, someone who earns $400,000 at the high-point of their career may still receive over $80,000 in loan forgiveness. In the latter situation, a large, lump-sum tax payment is likely very fair.
The article provides some useful resources for those who are participating in the income-based repayment plan and those who are considering it, including:
One of several recent Pell Grant changes has made it harder for some students to finish school and earn a degree, according to Inside Higher Ed. Effective July 1st this year, the federal government decreased the duration of Pell eligibility from 18 semesters to 12 semesters as a means of both cutting costs and incentivizing students to graduate on time. While most students take less than 12 semesters to earn their bachelor’s degree, existing Pell recipients (who expected to receive 18 semesters of eligibility) were not grandfathered in when the changes took place.
Of the estimated 62,000 students affected by the change, colleges say the hardest hit were transfer students and students who have attended some college, but never earned a degree. More specifically, many impacted students seem to be those who:
- Left school before graduating, but have returned to complete their degree;
- Transferred, or “swirled,” between multiple schools—a growing trend in higher education;
- Enrolled with a for-profit institution, but transferred elsewhere before graduating; and/or
- Changed programs multiple times within the same school.
According to an “informal tally” by the California State University system, about 6,100 of the system’s students (4 percent) lost Pell Grant eligibility because of the new 12-semester limit.
Since some students who lose eligibility may not be able to afford to continue their education and earn a degree, this change could conflict with the government’s emphasis on improving graduation rates and increasing the number of degree-holders. However, as Congress gears up to deal with impending sequester cuts, the financial benefits of these types of tough decisions are increasingly likely to outweigh the nonfinancial costs.
Last Friday, the U.S. Department of Education released its annual update on federal student loan cohort default rates (CDRs) and, although national CDRs are gloomily high, UW’s rates are impressively low. As the Department is in the process of switching to a more accurate three-year CDR measure, this year’s report includes both the FY 2010 two-year and the FY 2009 three-year CDRs. These rates represent the percentage of student borrowers who failed to make loan payments for 270 days within two or three years, respectively, of leaving school.
The Department provides breakdowns of its data by institution type, state and school. Here are some key findings:
- The FY 2010 two-year CDR increased from 8.8 to 9.1 percent overall. Public institutions increased from 7.2 to 8.3 percent, private nonprofits increased from 4.6 to 5.2 percent, but for-profits decreased from 15.0 to 12.9 percent (though their two-year CDR is still the highest).
- The FY 2009 three-year CDR is 13.4 percent overall (this is the Department’s first year reporting three-year data) with public institutions at 11 percent, private nonprofits at 7.5 percent, and for-profits at 22.7 percent.
- UW’s three-year CDR is a remarkable 3.1 percent—more than 10 percentage points below the national average.
- UW’s two-year CDR increased slightly from 1.4 to 2.1 percent, but is still well below the national average.
- The State of Washington’s three-year CDR is 11.3 percent—below the national average, but still above approximately half the states.
Unfortunately, the Department does not release loan default rates disaggregated by student demographic (even though it collects this information), which prevents schools from identifying and catering assistance to students with the most need. While third-parties have conducted studies indicating that Pell Grant recipients and Latino students are more likely to default on loans, schools and legislators need better data from the federal government in order to fully identify at-risk groups and mitigate rising default rates.
The Pell Grant program, the largest federal student grant program, was expected to be $20 billion short of the $40 billion price estimated for FY12 (which ended July 1). However, the Department of Education surprised many with newly-released data showing the federal government not only spent well under that estimate at only $33.4 billion, but in fact $2.2 billion less than FY11.
Recently, Pell eligibility increased dramatically as college enrollments rose and the recession continued to impact family/student income. This trend continued in FY12 and, interestingly, the dip in Pell spending occurred despite a 58,000 increase in Pell recipients—to almost 9.7 million. In fall 2011, nearly one quarter of UW freshmen were Pell eligible.
Reasons for the decline in Pell spending include:
- The elimination of the year-round, or summer, Pell Grant, which allowed students to qualify for two awards in a year.
- More students attending college part time as part-time status reduces Pell award amounts.
- Fewer students attending for-profit institutions, which tend to enroll students who qualify for larger awards. Recent bad press and slumping enrollments have hit for-profits hard. Consequently, the number of Pell recipients at for-profits declined by 108,000 students, to roughly 2.1 million, and accounted for $1.4 billion of the decrease.
The drop in Pell expenditures is a relief for most lawmakers as they face next year’s “fiscal cliff” and must address both the impending tax hikes (when Bush tax cuts expire) and the automatic spending cuts (as mandated by the sequester). The Obama administration and congressional Democrats have resisted financial aid-related budget cutting, maintaining the maximum Pell award of $5,550 and writing specific protection for Pell Grant funding into the Budget Control Act. However, recent financial straits have already caused the federal government to eliminate several student loan programs such as the previously-mentioned summer Pell Grant, the six-month grace period for loan repayment, subsidized Stafford Loans for graduate students, and incentives for early loan repayment. With the sequester and difficult budget decisions looming on the horizon, it is safe to say that no funding is safe.
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