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How much is income-based repayment helping?

man at financial aid office

Some call it a bubble. Others believe it's a crisis. But for many graduates, it's simply an obstacle that prevents them from buying homes, starting families and amassing savings. Student loan debt in the United States is now nearly $1.2 trillion, according to the Consumer Financial Protection Bureau, and the average class of 2012 borrower is lugging around a nearly $30,000 share, reports the Project on Student Debt. The steep debt and tricky employment prospects new grads face make financial hardship programs, like the government's four income-driven repayment plans, crucial safety nets for borrowers who can't make standard monthly payments.

But the long-term benefits of these plans are currently being questioned. One of the two major repayment plans up for debate is the Income-Based Repayment Plan (IBR), which caps payments on federal Direct, Stafford, Consolidation and student PLUS loans at 15 percent of the borrower's discretionary income. The other is the more recently enacted Pay as You Earn plan, which reduces payment caps to 10 percent of discretionary income but does not cover some federal Stafford Loans issued before 2010.

Under both plans, borrowers who make several years of consecutive payments — 25 years under IBR and 20 under Pay As You Earn — are eligible to have any remaining debt forgiven, though they'll need to pay taxes on the forgiven amount. A separate program designed to ease the burden for students who enter public service professions such as teaching or social work forgives debt after 10 years for borrowers enrolled in either repayment program, and it doesn't come with any tax liability.

Loans rise with college costs

Critics agree that income-driven plans provide a necessary protection for low- and middle-income borrowers who may have trouble footing higher education debt, but there's significant debate as to what impact these programs have on controlling college costs, whether the tax ramifications that accompany loan forgiveness are fair and who really benefits when high debt is forgiven.

"One of the features of our financial aid system, particularly when it comes to loans, which is very dangerous is that we really have no price discipline embedded," says Barmak Nassirian, director of federal relations and policy analysis for the American Association of State Colleges and Universities. "We simply assume that people will make good choices and they won't overpay, but the fact is, easy credit begets easy price inflation, and some thought has to be given to what the federal role is here in terms of containing that possibility."

College costs have undoubtedly skyrocketed over the past few decades — average tuition increases outpace inflation by 200 to 300 percent, reports FinAid.org. But the problem is compounded by budgetary changes that place more burden on families, says Lauren Asher, president of The Institute for College Access & Success, the nonprofit research and policy organization that oversees the Project on Student Debt.

"There's been tremendous cost-shifting from states to students," Asher says. "The Pell Grant, despite recent increases, now covers less than one-third of what it costs, on average, to attend a public four-year college [in-state]. That's the lowest since the program began." She adds, "Income-driven plans are a crucial safeguard for borrowers in an era when student loans are becoming more and more necessary to get through school."

Who benefits most?

Asher says that the fiscal benefits Income-Based Repayment provides for low- and middle-income borrowers are substantial, but others wonder if the program combined with its loan forgiveness provision discourages middle- and higher-income borrowers from controlling their college debt. Two separate reports by the New America Foundation and the Brown Center on Education Policy state that Income-Based Repayment disproportionately helps high-debt borrowers who attend expensive institutions.

"When you think about where the benefits of [Income-Based Repayment] should go, it's apparent that we want this to be going to low-income people," says Beth Akers, a fellow and co-author of the Brown Center study. "... We're effective in achieving that with the current policy. About three-quarters of the benefits in either Income-Based Repayment or Pay As You Earn are going to people who are in the bottom quartile of the earnings distribution. We think that's pretty successful."

But she is not in favor of the loan forgiveness portion of the plan.

"What we could potentially have happen is that students are less sensitive to [college] price on the front end because they anticipate having access to this forgiveness benefit down the line," Akers says.

Under the current plans, forgiveness takes place after 10 to 25 years of enrollment, meaning that current borrowers enrolled in either IBR or Pay As You Earn aren't yet eligible to have their debt forgiven. Akers is in favor of eliminating loan forgiveness entirely, but the White House's 2015 budget proposal presents a more modest solution of capping public service forgiveness at $57,500. Loosening eligibility requirements on the Pay As You Earn program, extending the forgiveness period to 25 years for borrowers with more than $57,500 in debt, and capping the amount of interest that can accrue in cases when a borrower's monthly payment can't cover interest are also included in the proposal.

The goal, for both the White House and education policy analysts, is to find the best way to safeguard income-driven plans and other protections that open college access to low and middle-income borrowers.

"If, as a nation, we've made the decision to package people with debt to give them an opportunity to access higher ed, surely we have an obligation to put a safety net to catch those for whom the enterprise doesn't pan out," says Barmak Nassirian.

Sources:

Beth Akers, Fellow, Brown Center on Education Policy at the Brookings Institution, Interviewed by the author, May 14, 2014

"Student Loan Safety Nets: Estimating the Costs and Benefits of Income-Based Repayment," Beth Akers and Matthew M. Chingos, Brown Center on Educational Policy at the Brookings Institution, April 2014,
http://www.brookings.edu/~/media/research/files/papers/2014/04/14%20student%20safety%20nets/ibr_online.pdf

Lauren Asher, President, The Institute for College Access & Success, Interviewed by the author, May 15, 2014

"Student Debt Swells, Federal Loans Now Top a Trillion," Rohit Chopra, Consumer Financial Protection Bureau, July 17, 2013,
http://www.consumerfinance.gov/newsroom/student-debt-swells-federal-loans-now-top-a-trillion/

Tuition Inflation, FinAid: The SmartStudent Guide to Financial Aid,
http://www.finaid.org/savings/tuition-inflation.phtml

"Average Student Debt Climbing: $29,400 for Class of 2012," The Project on Student Debt, The Institute for College Access & Success, Dec. 4, 2013,
http://projectonstudentdebt.org/files/pub/Student_Debt_and_the_Class_of_2012_NR.pdf

Barmak Nassirian, Director of Federal Relations and Policy Analysis, American Association of State Colleges and Universities, Interviewed by the author, May 14, 2014

"New Report: Income-Based Student Loan Repayment a Windfall for High-Income Borrowers," New America Foundation, Oct. 16,2012,
http://newamerica.net/pressroom/2012/new_income_based_student_loan_repayment_a_windfall_for_high_income_borrowers

"Budget of the U.S. Government, Fiscal Year 2015," Office of Management and Budget, Executive Office of the President of the United States, March 4, 2014, pages 72, 363-64,
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/budget.pdf

Public Service Loan Forgiveness, Federal Student Aid, U.S. Department of Education,
https://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/public-service

Public Service Loan Forgiveness: Questions and Answers for Federal Student Borrowers, Federal Student Aid, U.S. Department of Education,
https://studentaid.ed.gov/sites/default/files/public-service-loan-forgiveness-common-questions.pdf

Repayment Plans, Federal Student Aid, U.S. Department of Education,
https://studentaid.ed.gov/repay-loans/understand/plans