Report Suggests There May Be Negative Consequences to Increased IDR Participation

By Joelle Fredman, NASFAA Staff Reporter

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

Brenda T | 3/7/2018 11:32:22 AM

leave it to the feds to implement a program without doing enough research to know how things will come out on the back end

David S | 3/6/2018 1:55:12 PM

Every time I hear a student loan opponent cite "cost to the government" of IDR, I want to scream. The "cost" is the money coming in at a slower pace, which is directly responsible for more interest accumulating over time, thereby increasing the government's income and profit on these loans. Enough of the accounting tricks in which an expense is income and money received is counted as a loss and all these other sleights of hand. If these or any other authors are suggesting that IDR - which is the standard method of repayment in most countries with student loans - leads to over-borrowing, they are simply wrong. Those who over-borrow do so without knowing what their monthly payments will be under any IDR plan, as they don't know what their future earnings will be. This behavior predates IDR plans.

Eliminate the $0 monthly payment and go back to a minimum monthly payment, be it $25 or $50 or whatever (can't afford that much, you either get an unemployment deferment or forbearance)...this way you take away the "not paying down $1" scenarios that fuel many of these arguments. And borrowers will repay faster. But wait...then we'll see the articles complaining that students can repay without sufficient interest accumulating...

Mary M | 3/6/2018 12:52:07 PM

NCES comes to the conclusion that students with IDR plans borrow much larger amounts than those not enrolled in IDR plans "because they know they can repay funds in small increments." This conclusion is faulty because students choose a repayment plan AFTER they separate from their school, not when they are first taking out the loans. It's more likely that students choose their career path, the school they want to attend, and then take out the amount of loans needed to get the education they desire. Then when it's time to make payment on the loans, they decide on the type of repayment plan that suits their financial situation. This study wrongly suggests that students in IDR plans are "takers" trying to work the system. That is an unfair and biased suggestion.

Charles P | 3/6/2018 11:53:56 AM

I'm not sure I understand the surprise in that students with higher undergraduate debt are more likely to use an IDR plan - it is purely math. For example, take two grads, one with $35K the other with $20K in debt. They take an "average" starting job of about $50K (I know there is wide variation, but multiple studies placed the average around there last year, and the authors use averages in their work). The graduates then consider their repayment options.

The borrower with $20K in debt will have a $210 10-year payment and approximately $267 PAYE payment. There is no partial hardship, so the borrower CAN'T enter the plan.

The borrower with the $35K will have a $362 10-year and the same $267 PAYE payment. The borrower could choose PAYE, but the difference is only $95 per month.

Students with borrowing between $26K (the lowest that would trigger any partial hardship) in this example and $35K would have to consider whether the hassle of sign-up and renewals are worth the modest payment savings of under $100 per month (about 2% of income) especially since they will phase out of IDR eligibility rather quickly.

To note, even an impossible $70K of undergraduate Stafford would not suffer from negative amortization on a $50K Adjusted Gross Income. So in short, IDRs are useful only to those with relatively high debt and/or relatively low starting income. That seems to be exactly what what was intended.

Billy B | 3/6/2018 9:31:04 AM

So people with higher loan debt decided that IDR worked for them. Also People who wanted to work in field that traditionally had lower pay used IDR to make their path possible. This to me sounds like IDR is giving people more freedom to choose their adult path and still satisfy their obligation towards their loans instead of having their path chosen by their limited funds and future loan debt.. If you want to lower loan debt provide more free sources of funding to pay for college instead of suggesting that the current only way to get to choose your career and still scramble your way out of debt before you are eligible for social security.

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