Policymakers should make significant changes to the federal student loan repayment system, including moving to a single, automatic income-driven plan, reinstating borrowing limits for graduate students, and tying the terms of repayment to the total amount borrowed, according to a new research brief.
In the brief – which was one of several released this week by the Urban Institute – authors Sandy Baum and Matthew Chingos said the current loan repayment system is too complicated for borrowers, has poorly-targeted benefits, and can create perverse incentives for institutions to raise tuition in some cases. They suggested replacing all of the current repayment plans with one income-driven plan in which all borrowers would be automatically enrolled, with their required monthly payments automatically adjusted through payroll withholding.
Higher education "is an investment that involves considerable uncertainty, and the student loan repayment system should mitigate the risk for borrowers, a risk that is increasing as college prices rise and reliance on debt increases," the brief said.
The idea has been floated by other researchers and policymakers before in similar forms. In fact, in his fiscal year 2018 budget proposal, President Donald Trump suggested creating a single income-driven repayment plan that would set monthly payments at 12.5 percent of a borrower’s discretionary income, and set forgiveness at 15 years for undergraduate borrowers and 30 years for graduate borrowers.
However, Baum and Chingos’s proposal goes further by making other suggestions that form a comprehensive plan. In addition to creating a single repayment plan with payroll withholding, Baum and Chingos suggested reinstating borrowing limits for graduate students, who currently can borrow up to the cost of attendance through the Grad PLUS program. They proposed eliminating Grad PLUS and keeping Direct Loans for graduate students, allowing them to borrow up to $20,500 per year.
The authors also proposed tying the terms of repayment – both the length of the repayment term and the share of income required for monthly payments – to the total amount borrowed. Borrowers with lower amounts of debt – $10,000 or less, for example – could have shorter repayment terms, with balances forgiven after 10 years. Those with more debt ($30,000, or $90,000, for example) would have longer repayment terms (of 20 and 30 years, respectively). As far as monthly repayments, the authors suggested increasing the share of income required with the total amount borrowed.
"This approach would make it more difficult to help students predict future loan payments when they are making borrowing decisions, but would ensure that higher debt levels lead to higher repayment expectations for all borrowers," the brief said.
The brief also suggested better targeting the benefits of the federal loan repayment system. One way to do that would be to make sure forgiven balances are not taxed, according to the brief, and replacing Public Service Loan Forgiveness with benefits for certain sectors in "a more focused way," such as through tax credits.
"The system we have proposed will be easier to understand, accessed automatically, and flexible in timing," the brief said. "It provides insurance for borrowers whose long-term income is too low to support their debts, without asking taxpayers to repay loans for borrowers who are in the upper segment of the income distribution. The system directs subsidies only to those borrowers whose financial circumstances make them appropriate recipients of transfers from taxpayers. These reforms can make a significant difference for students, making college a less risky, more affordable option. The reforms can also reduce the impact of the student loan program on the federal budget."
Publication Date: 9/21/2017