A policy paper on income-based repayment (IBR) of federal loans just released by New America Foundation assessed the potential changes to IBR policy and found that while some debtors – primarily graduates of graduate and professional programs – will benefit greatly from changes, low-income debtors will see few benefits and in some cases, middle-income debtors will be negatively impacted.
IBR was first created in 2007. The IBR plan up until 2011 capped borrowers’ payments at 15% of their income and forgave debt after 25 years. In 2010, Congress approved a new IBR plan proposed by President Barack Obama that would decrease payments to 10% of income and forgive debt after 20 years. While the program was not set to go into effect until at least 2014, the administration saw to it that students who first took out federal loans in 2008 or later, and also took out a loan in 2012, could be eligible for the program as early as 2012.
IBR plans are valid on federal Stafford loans, Grad PLUS loans, and many other federal loans. They are not valid on Parent PLUS loans or any consolidation package that includes Parent PLUS loans, or private loans.
To be eligible for IBR, borrowers must meet certain debt-to-income requirements. Borrowers are granted a cost-of-living exemption equal to 150% of the federal poverty guidelines – rather than being charged solely on income – in order to ensure they aren’t spending money on loan repayment that they need in order to live. The exemption is the same under the new IBR plan as it is under the old plan.
After analyzing hundreds of different financial scenarios for borrowers at different income levels and with different debt amounts to determine the results the change in IBR plans would have on various debtors.
Lower-income borrowers should benefit, but very slightly. Many low-income borrowers, because they earn so little, would see only a difference of between $5 and $20 per month. For low-income borrowers, though, that could mean the difference in meals. The shorter loan forgiveness time would be of some benefit, the research found, but those who earn enough income to pay back loans are paying very little already.
Middle-income borrowers who borrow the maximum amount of federal student loans ($31,000 for dependent undergraduates) will feel some of the benefits of the new IBR plan. They will accrue less interest under the new plan and make lower monthly payments. Borrowers who owe more than $25,000 will likely get the benefits of loan forgiveness as well, and the five-year shortened time would essentially eliminate the extra interest they would accrue.
On the contrary, middle-income borrowers who do not borrow the maximum amount, or who borrow less than $25,000, will end up paying more under the new IBR than they would under the old plan. The research found that they pay more for a longer time, accrue higher interest rates in time by making lower monthly payments, make lower payments at first then higher payments later, and will likely repay their loans in full in 20 years, negating the benefit of loan forgiveness.
Graduate students, whose federal borrowing has no limits, will benefit because they will see only a small portion of the cost for each dollar borrowed over $40,000, and no additional cost past $60,000, even if they earn what is considered to be a high income during repayment. They are likely to have a lot of debt forgiven. Under new IBR, graduate and professional students are expected to be less sensitive to tuition costs.
Policy recommendations were made based on the paper’s findings, in order to “mitigate the benefits” to high-income and high-debt load borrowers, minimize the incentives to graduate and professional schools to raise tuition, and continue the benefits to lower-income borrowers.
- The 10% of income standard should remain, but only for borrowers whose incomes are at or below 300% of the federal poverty guidelines. Those with incomes above that amount should pay 15%.
- The 20-year forgiveness aspect should remain intact, but only for borrowers whose loan balance when they entered repayment was less than $40,000—those who borrowed more should get forgiveness after 25 years.
- Federal agencies and policymakers should be forthcoming and transparent about the “negative consequences” borrowers may face when repaying through IBR, and clarify that making smaller payments could mean paying more overall. Additionally, agencies should promote the loan consolidation repayment option as well as the IBR option.
- Loan forgiveness should be tax-free, rather than treated as taxable income.
- All borrowers, regardless of when they began borrowing, should be allowed to enroll in an IBR.
New America Foundation is a nonprofit, nonpartisan, public policy institute. Its mission is based on the premise that each generation should live better than the last—a premise that it currently feels is “under strain.” The foundation was launched in 1999 and is headquartered in Washington, D.C.
Follow Anna Schumann on Twitter at @ASchumannCMN.