Congress acts to cap monthly payment for low-income borrowers with student debt

Congress is poised to make big changes to the government programs tapped by millions of students to pay for college. The biggest of these for students: a cap on what low-income borrowers have to pay back each month on their federal student loans.

Measures passed by the House last week -- and one by the House earlier this month -- come in response to growing concerns about student debt. About two in three recent college graduates have loan debt, and over the past decade, the average amount has grown 50 percent faster than inflation.

College students also might find it easier to apply for government-backed loans under another bill the Senate is planning to consider next week. That bill would simplify the application process for federal financial aid and would address conflicts of interest in the student loan industry

The House and Senate student loan bills would cap annual payments for students at a percentage of their income, a move aimed at preventing people from having to pay more than they can afford.

Both bills also would offer loan forgiveness for those who go into public service professions after 10 years of making payments.

Meanwhile, just over the last two years interest rates have risen enough to more than double the total interest some borrowers will eventually have to repay on their loans.

But the moves in Congress also reflect a more nuanced picture of student borrowing. The median debt for students pursuing a bachelor's degree is about $20,000. That's a lot, but it's a level experts consider manageable for most students, considering how much more college graduates eventually earn.

The real concern is the growing number of students piling up significantly higher debts than the average. That trend has an indirect cost even for non-borrowers: discouraged by high monthly payments, talented people decide not to pursue careers in relatively low-paying but critical public service jobs like teaching.

The idea of limiting monthly payments for those with low incomes dates back a half-century to conservative economist Milton Friedman. Other countries like the United Kingdom and Australia have adopted it. But in the United States, it's gained traction only in part of fractured network of federal aid programs, notably direct lending.

There are also scattered programs of outright loan forgiveness, targeting groups such as teachers and child-care providers in low-income communities.

Now, the Democrat-controlled Congress is on the verge of significantly expanding the number of student borrowers who could get a break. Congress has endorsed expanding loan repayment to anyone under an income threshold, not just those who borrowed under the government's direct lending program. The change would expand the option to participants in the full range of federal loan programs, including about 10 million undergraduates with Stafford loans.

While details of the House and Senate bills need to be reconciled, both envision capping monthly payments at what students can afford. Repayment wouldn't be required until borrowers are earning 150 percent of the poverty line, and would be capped at 15 percent of income beyond that.

Other provisions expand loan forgiveness options for public-service careers, and forgive loans entirely after 20 or 25 years of repayment. Republicans and President Bush have opposed aspects of the aid reforms, but overall they do not appear to have focused on the loan repayment provisions.

"The principle here is if you go to college and take out a reasonable amount of federal loans, you should be able to pursue your goals and career and life without having that debt drive your actions," said Luke Swarthout, of the group U.S. PIRG, which lobbies for student aid.

Terry Hartle, senior vice president at the American Council on Education -- an umbrella group representing colleges and universities -- says his group supports the idea but wants some details changed in reconciliation. He notes such programs are hard to administer because they involve collecting financial information from borrowers.

Another downside is that, by expanding loan forgiveness, the government forfeits money it might collect down the road. But Swarthout says that provision is likely to affect very few people.

And by letting low-income borrowers pay back less each month when they need to, he said, the government will see fewer defaults and ultimately collect more.