Changes to Income-Based Repayment for Student Loans: "Safety Net or Windfall?"

Our colleagues Jason Delisle and Alex Holt of the New America Foundation's Federal Education Budget Project have released a new paper "Safety Net or Windfall?" on the 2010 changes to federal student loan program's Income-Based Repayment (IBR) plan. The IBR plan was designed to help with student's loan repayment by limiting payments to 15 percent of their income and forgiving the remaining balance after 25 years. In 2010, the administration proposed changes to limit payments to only 10 percent of student's incomes and forgive any balance after 20 years.

While the proposal was intended to help middle class families with student loan debt, the changes actually benefit higher-income earners with graduate or professonal degrees the most. Because IBR is based on Adjusted Gross Income (AGI) and not an individual's entire gross income, it benefits those who have significant contributions to retirement plans or employer-sponsored health insurance, which is more typical of higher-income earners rather than lower income earners. Also, the maximum repayment caps limit monthly payments even for those with incomes that no longer qualify for reduced payments in the IBR program, leaving windfall benefits for those whose student loan repayments may no longer be a significant burden.

To address these issues, the authors list a few recommendations to scale back repayment limits for high-income and high-debt borrowers. These include maintaining the 10 percent cap only for those at or below 300 percent of the poverty line, instituting the loan forgiveness after twenty years only for those with $40,000 or less in loans (those with greater loans would be eligible after 25 years), and eliminating the maximum payment cap for those whose incomes no longer qualify.

You should also check out their IBR calculator that will show the direct impact of the proposed changes for monthly payments and loan forgiveness. Both the paper and calculator are an interesting insight into how the student loan program currently works and how it can be changed to better serve its intended purpose.

The paper can be found here and the calculator can be found here.