Report: Income-Based Repayment Benefits High-Income, High-Debt Borrowers
Alterations to the federal government’s Income-Based Repayment program will create massive loopholes that could be a boon for borrowers with the highest incomes while failing to provide equal relief for low-income borrowers struggling to make their payments, according to a recent report by the New America Foundation.
The nonprofit, nonpartisan group’s Oct. 16 report asserts that changes to the popular IBR program will primarily benefit those with the highest federal student loan debt – graduates who likely hold professional and graduate degrees – and the highest earning potential.
The U.S. Department of Education’s new IBR system would prove a “windfall” for those borrowers while doing little to help middle and low-income borrowers maintain reasonable and affordable payments, according to the report.
The new IBR, which passed through Congress two months after President Obama introduced the initiative during his 2010 State of the Union address, will become effective in 2014 and caps borrowers’ payments at 10 percent of their incomes and forgives any remaining debt after 20 years of payments. Through regulation, the Obama administration is implementing these changes, deemed the Pay As You Earn (PAYE) plan, two years ahead of schedule, beginning in 2012. The current IBR program forgives outstanding debt after 25 years of repayments and limits borrowers’ payments to 15 percent of their income.
The foundation’s report points to the California Western School of Law for an example of how the new IBR would be advantageous for well-off graduates.
In 2010, the average indebted California Western graduate paid almost $1,700 in monthly loan payments. Changes to the IBR program would allow a Cal Western graduate earning $70,000 annually to pay $448 a month and have about $100,000 in debt forgiven.
“If left unchanged, the program is set to provide huge financial windfalls to people who, far from being needy, are among the most financially well-off graduates in today’s job market,” the report states. The report contends that if the new IBR loopholes are left unclosed it “will divert taxpayer dollars to wealthy graduates while simultaneously reducing incentives for overly expensive colleges to restrain tuition growth.”
A White House fact sheet explaining the newest IBR provisions said that a teacher earning $30,000 a year would pay $114 a month in student loan payments under revised repayment system. The new IBR doesn’t account for that teacher being married, which likely would place that borrower in a different income bracket. The teacher would continue to reap the benefits of IBR if he or she doesn’t file taxes jointly.
“Any relief should help those low and middle income borrowers,” said Lauren Asher, president of The Institute for College Access & Success. “Even small reductions in payments do matter when you have limited income. Every dollar matters in this economy.”
The foundation suggests a range of changes to the proposed new IBR, including making the lower payment calculation of 10 percent of yearly income eligible for borrowers who make less than $33,510 annually. This would make it “much less likely that high-income borrowers will receive loan forgiveness,” while providing relief to those who most need it.
The new provisions should also maintain the loan forgiveness threshold of 20 years, but only for borrowers whose loans didn’t exceed $40,000 when they began repayments, New America Foundation suggested.
Policymakers should make a concerted effort to better publicize IBR’s benefits, Asher said. There are about 900,000 student loan borrowers enrolled in the program, according to federal statistics.
“Default rates show that IBR could be helping a lot more people avoid default,” Asher said. “Much more must be done to reach struggling borrowers.”
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