Income Based Repayment. How Might it Really Work?

Two years ago President Barack Obama announced the income-based repayment plan on student loans. The current program allows borrowers pay only 15 percent of their discretionary income toward their loans; the federal government forgives the balance remaining after 25 years of payments. Under the administration’s changes borrowers pay only 10 percent of their income toward the loans. Their loans are eligible for forgiveness after only 20 years.

How’s that going to work out?

Well, that depends on your expectations. According to a new study by Jason Delisle and Alex Holt of the New America Foundation, rich people benefit a lot more, and it might cause tuition increases:

Lower-income borrowers will see minimal new benefits. These borrowers have too little income above IBR’s “cost-of-living” exemption, such that reducing the share of their income used to calculate their monthly payments amounts to a reduction of $5 to $20 in their monthly payments. The shorter loan-forgiveness time period is of some benefit, but only truncates a repayment schedule under which borrowers were making no payments or very small monthly payments to begin with.

There are benefits, but they come mostly to the affluent:

Middle- and high-income borrowers who attend graduate and professional school will see significant new benefits. The federal student loan program allows graduate students to borrow unlimited amounts to pay for the cost of their education. Due to the pending IBR changes, these borrowers will bear only a fraction of the incremental cost of borrowing an additional dollar once they reach $40,000 in debt, and incur no incremental cost in borrowing an additional dollar after they reach $60,000 even if they earn a high income over most of their repayment terms. Borrowers with such debt levels are very likely to have substantial amounts forgiven under the pending changes to IBR, even if they earn incomes well above $100,000.

Of course, the fact that the policy helps rich people more than it helps poor people doesn’t mean the policy is bad (one could say that about a whole lot of tax policies) but still, let’s keep this in context. IBR doesn’t really make college more affordable, and it’s unlikely to get more poor people through college.

Another very real problem with IBR, according to Delisle and Holt, is that it might actually cause graduate tuition spikes. As they explain, “the changes will encourage schools, particularly graduate and professional schools, to market IBR’s benefits to prospective, current, and graduating students as a means of financing higher tuition and fees instead of attempting to make the schools more affordable.”

People who graduate with a whole lot of debt, after all, can have that debt erased after 20 years, no matter how much is left. If that’s true, there’s little incentive for graduate programs to keep costs down. What’s another $10,000 if universities can argue graduates don’t ever really need to pay it?

In response to the report, Education Department spokesman Justin Hamilton said that income-based repayment “isn’t necessarily right for everyone, but it can be an incredibly helpful resource for people struggling to manage their student loan debt.”

Well, right. That’s sort of what the report says. It’s better for middle class people. But how about that graduate school tuition question? That represents a very real, and potentially very expensive, unintended consequence of the reform. Isn’t that something to address?

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer