Impact of Income-Based Repayment Changes –

A report recently released by the New America Foundation, a nonprofit, nonpartisan public policy institute, examined how changes to Income-Based Repayment (IBR) would potentially affect borrowers of different types by using calculations for several different scenarios.

Created by lawmakers in 2007, IBR refers to a program that limits students’ loan payments to 15% of their income, forgiving any balance after 25 years of payments. Most major types of federal student loans, with the exception of PLUS loans for parents, are eligible for IBR.

President Barack Obama urged Congress to change the existing IBR plan in 2010, arguing that high college tuition is an indefensible burden for the middle class and that lawmakers could provide relief to borrowers by reducing payments to 10% of a borrower’s income and by providing loan forgiveness after 20 years of repayments.

Congress enacted the proposal two months later, but limited it only to students who took out their first loan July 1, 2014 or later. However, in 2011, the Obama administration announced the plan would be available sooner—to borrowers who took out their first loan in 2008 or later and took out at least one loan in 2012 or later—meaning eligible borrowers could enroll by late 2012.

In order to be eligible for IBR, borrowers must meet certain requirements, including a specific debt-to-income ratio, as well as a cost-of-living exemption, which is equal to 150% of federal poverty guidelines, rather than being calculated based on income only.

Among the report findings for the new IBR are:

  • Lower-income borrowers will see minimal new benefits because they have too little income above the IBR’s “cost of living” exemption. Their monthly payment reductions would only be between $5 and $20.
  • Middle-income borrowers will see some increase in benefits, but only if they borrow the maximum in federal student loans. Still, loan limits will minimize those benefits the new IBR provides to borrowers with loans for undergraduate studies. Middle-income borrowers with less debt will end up paying more for longer under the new IBR.
  • Middle-income and high-income borrowers who attend graduate and professional school will see the most benefits. Under the new IBR, these borrowers bear a small portion of the incremental cost of borrowing an additional dollar once they reach $40,000 in debt and incur no incremental cost after reaching $60,000 in debt, regardless if they earn a high income over most of their repayment terms.

Report authors consider both the old and new IBR as “safety nets” for borrowers struggling to repay, but believe the new IBR may offer a windfall benefit to high-income, high-debt borrowers. They make several recommendations to lawmakers regarding the new IBR. Some of those recommendations are:

  • Keep the lower payment calculation, 10% of income, for borrowers with incomes at or below 300% of federal poverty guidelines.
  • Borrowers whose loan balances did not exceed $40,000 when they entered repayment should have loan forgiveness after 20 years of payments, but borrowers with higher initial balances would qualify after 25 years of repayments.
  • Get rid of the maximum payment cap which allows high-income borrowers to make payments that are not based on their incomes.

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