Proposed Changes to Income-Driven Repayment Are Expensive and Poorly Targeted
The Department of Education released a proposed rule on January 10 providing details of planned changes to income-driven repayment (IDR) for student loan borrowers. These details closely align with the broad strokes that were announced at the same time as student loan forgiveness in August 2022.
The current IDR system is a mixed bag, providing much-needed assistance to some low-income borrowers by helping them avoid default, but its complexity makes it difficult to navigate for many while allowing others to game the system. The proposed rule would make major changes, but they come with a price tag in the hundreds of billions. Limitations on the changes that can be made through executive action also make the proposed rule an incomplete reform of IDR. Bipartisan legislation is needed to streamline IDR, reform other aspects of student loans, and target aid to those most in need.
The impact of the proposed changes to the IDR system can be broken down broadly into good, mixed, and bad news.
- Good news:
- Simplification: The Department of Education predicts that almost all borrowers in IDR would use the new version of the Revised Pay as You Earn (REPAYE) plan. This would allow the Department to phase out most other IDR plans, simplifying the system.
- Less paperwork: Borrowers who fall behind on their payments on a standard repayment plan and are in danger of default would be automatically switched to REPAYE if the Department of Education has access to their income information. This would help low-income borrowers avoid default without requiring additional paperwork on their part.
- Mixed news:
- Changes for low balances: Borrowers with original loan balances of $12,000 or less would be eligible for full loan forgiveness under REPAYE in only 10 years. This change is designed to help borrowers such as community college students, students who enrolled in shorter credential programs, and those who attended college without completing a credential, all of whom have both less debt and more difficulty repaying on average than someone with a bachelor’s degree. Borrowers with low balances are more likely to default than those with high balances, and so providing those borrowers with faster timelines to forgiveness may help those most in need of assistance. However, student debt accrual is also correlated with race and gender; the likelihood that a borrower’s balance falls above the $12,000 line is higher for women and Black borrowers. Providing faster loan forgiveness to borrowers with less debt may worsen race and gender disparities in the student loan system. This change combined with others could also increase the likelihood that institutions where students currently take on low levels of debt see an opportunity to increase tuition, assuming that loans borrowed to pay that tuition will be forgiven.
- Ending “debt traps”: Borrowers whose monthly payments do not cover the accrued interest on their loans would have the remaining interest waived rather than added to their balance. This would prevent “debt traps” for borrowers with low incomes, high balances, or both, who would otherwise see their student loan balance increase over time even while making payments. Some of those who would be helped by this change, however, would be borrowers with high levels of debt from professional degrees and whose incomes are low early in their career but rise substantially later on.
- Bad news:
- Major changes in repayment formulae: At this time, REPAYE exempts income up to 150% of the federal poverty level (FPL) before calculating monthly payment amounts, with a borrower’s remaining income referred to as discretionary income. As such, borrowers with incomes under 150% of the FPL have $0 monthly payments on REPAYE. The new REPAYE plan would increase that exemption to 225% of the FPL for all borrowers. In addition, the new REPAYE plan would decrease monthly payments from 10% of discretionary income to 5% of discretionary income on payments toward undergraduate debt. As a result, all borrowers on REPAYE would see substantially decreased payments regardless of their income. Although such relief may be warranted for some, offering it across the board would be regressive and costly. Notably, high-income undergraduate-only borrowers using REPAYE would see their payments decrease by over half.
- Overall cost of the rule change: Though these changes to REPAYE would decrease the monthly burden for borrowers, they would greatly increase the loan balances that would be forgiven through REPAYE, Public Service Loan Forgiveness (PSLF), or other avenues. This would dramatically raise the cost of the student loan program to the federal government and taxpayers, with a cost estimated by the Department of Education at $138 billion over 10 years. However, this estimate makes several problematic assumptions: that the student loan forgiveness announced in 2022 will be implemented as announced; that borrowers repaying loans on standard repayment plans will not switch to a much more generous version of IDR; and that the existence of a more generous REPAYE plan will not change how students borrow or impact tuition at postsecondary institutions. The likelihood is that long-term costs of the proposed changes would be higher than estimated, with much of the benefit accruing to borrowers with high incomes.
- Giveaway to low-value programs: The larger income exemption also raises the specter of academic programs with low earnings among graduates recruiting prospective students with the promise that most of their borrowers will have $0 student loan payments and can expect most of their debt to be forgiven. The new REPAYE plan would make programs where typical earnings of graduates are under 225% of the FPL essentially free to students even as institutions increase tuition and fees—because the federal government would foot the bill. Without a more robust accountability regime in higher education, this could be a boon for low-value programs.
BPC offered the Department of Education two substantial revisions that would better target the changes and reduce the overall cost of the new REPAYE plan. First: do not increase the income exemption, thus avoiding offering low-value programs and institutions an even larger windfall at taxpayer expense. Second: use a progressive repayment rate on discretionary income, such that low-income undergraduate borrowers pay only 5% of their discretionary income, but with higher marginal rates ensuring that borrowers with less financial need benefit less from IDR. BPC has proposed increasing marginal rates—particularly for high-income borrowers—to discourage the use of IDR to maximize loan forgiveness among professionals with high incomes.
Although the proposed rule tries to address some of the ongoing problems with IDR, many “common-sense” improvements to the higher education system cannot be accomplished by executive branch actions. For this reason, bipartisan legislation is more appropriate and necessary to fix the ongoing problems with U.S. higher education, including its student debt system and the burden it places on vulnerable borrowers. A comprehensive solution would include accountability standards for institutions whose programs produce poor student outcomes—to limit or end their eligibility to absorb federal student aid—and front-end affordability investments to reduce the price of college for all students. Building bipartisan legislation will ensure those solutions have the broad support needed for full implementation and lasting impact.
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