As more borrowers are enrolling in income-driven repayment (IDR) plans and policymakers are deciding how best to institute time-based loan forgiveness programs, a new report suggests that this method of repayment may actually worsen students’ financial situations.
In their report, ”Federal Income-Driven Repayment Plans and Short-Term Student Loan Outcomes,” RTI International research analysts T. Austin Lacy, Johnathan G. Conzelmann, and Nichole D. Smith warn that IDR plans have the potential to reduce students’ incentives to curb borrowing, and may result in borrowers paying more than the original amount due to the interest accrued over an extended period of time. They also insist that more research needs to be conducted on the outcomes of borrowers in IDR plans to inform policymakers’ decisions.
The number of Direct Loan borrowers enrolled in IDR plans, which the Obama administration attempted to improve, has increased to 6.8 million borrowers since last year — a 16 percent jump — according to a series of reports released through the FSA Data Center in December.
Despite the lack of data on the outcomes of the growing number of borrowers in IDR plans, reports have come out both in support of and critiquing this repayment method. While some studies have surfaced that show that IDR plans help relieve borrowers who attended underperforming institutions education from financial stress by taking into account their ability to repay loans, the Government Accountability Office (GAO) reported that IDR programs are a large burden on the federal government, costing it an extra $74 billion over the life of the loans.
IDR plans also gained the attention of President Donald Trump, who included intentions to consolidate all repayment options into a single plan in his fiscal year (FY) 2019 budget proposal. Under Trump’s plan, there would be one 15-year repayment plan for undergraduates with a discretionary income cap of 12.5 percent, and a 30-year repayment option for graduate students. Additionally, he proposed automatically enrolling what he referred to as "severely delinquent borrowers" into IDR.
The authors, using data from the National Center for Educational Statistics (NCES) and the National Student Loan Data System (NSLDS), found that although they are “sheltered from poor labor market outcomes,” borrowers enrolled in IDR plans with bachelor’s degrees, associate degrees, and certificates borrow much larger amounts than those not enrolled in IDR plans because they know they can repay funds in small increments. For example, students in bachelor’s degree programs enrolled in IDR plans borrowed an average of $15,000 more than those not enrolled in IDR plans.
“As IDR plans become more generous, students have less incentive to limit their borrowing, and less incentive to seek high-paying jobs, because upon leaving school their monthly loan payments depend only on discretionary income, not loan amounts,” they wrote.
The authors further argue that if students are more willing to borrow in larger amounts, schools will have less of an incentive to keep tuition prices down.
In addition to borrowing more, the authors found that students enrolled in IDR plans were slower to begin payments — less than 50 percent of bachelor’s degree borrowers in IDR plans paid $1 back over two years in the plan, as opposed to those not in the plan who began repayment within four to six months.
The authors found this, coupled with the large amount of funds borrowed, troubling because borrowers may end up paying more than the original amount owed due to accrued interest, and not receive the relief they anticipated after reaching the end of their repayment period.
“This is often thought of as a benefit, or at worst a break-even point, for the borrower because under IDR any remaining balance after the maximum repayment period is forgiven. However, under current policy, the forgiven amount is taxable as income, which could cause unforeseen or possibly unmanageable financial burden for some borrowers,” they wrote.
Due to these potential ramifications, the authors argue that as the enrollment into IDR plans continues to grow and policymakers are crafting legislation around these programs, research need to be conducted to explore the “tradeoffs” of such policies.
Publication Date: 3/6/2018