Proposals to income-based repayment (IBR) programs and education tax credits that are simple, easy to operate, and inclusive of all students who could benefit have the potential to make federal student aid stronger, according to a new report from the Urban Institute.
The report, co-authored by Senior Fellow Sandy Baum and Research Associate Martha Johnson, is a review of studies, reports, Congressional bills, and proposed policy changes related to IBR and education tax credits, two areas of higher education policy where there is broad consensus on potential changes. For example, the general consensus regarding IBR is that it should be the automatic repayment plan for borrowers and that payroll withholding should be used to draw payments. Similarly, there is consensus that the multiple tax credits and deductions for higher education and tuition expenses should be consolidated into one credit.
The review showed that while many of the proposals "would make the system more equitable and efficient," Baum and Johnson wrote that "the details of these approaches vary considerably, and some would likely generate unintended consequences that would not serve the interests of students or taxpayers."
Following their review of IBR proposals, Baum and Johnson determined that IBR enrollment should be automatic and universal so as to simplify the repayment process and ensure access to all borrowers. Automatic payroll withholding has the potential to further simplify the system and improve efficiency, particularly if the system is designed to minimize the burden on the Internal Revenue Service (IRS). Employer withholding would also "address delinquency among those who neglect their student loans despite having the income to pay," the authors wrote.
The review showed pros and cons for student loan forgiveness after a period of repayment. Should forgiveness be included in a universal IBR plan, the "assessment rates should be high enough and income exclusions low enough that most borrowers would be expected to fully repay their loans," Baum and Johnson wrote. Other possible design elements include limiting the amount of debt forgiven or forgiving the unpaid interest, which would prevent debt balances from increasing while the borrower has insufficient income.
Policymakers also need to take into account the impact of interest rates, income exclusions, required payment levels, and time to forgiveness, as they all affect borrowers with different income patterns over time differently, according to the authors. Another consideration is that making affordable payments "is not the same" as reducing the total dollars paid, and a universal IBR plan must work as well for older borrowers as it does for young adults, they wrote.
While some proposals recommend eliminating education tax credits and deductions, the overall consensus is that they should instead be consolidated into one credit. Baum and Johnson determined through their review that one credit would indeed be simpler than the existing multiple credits, noting that the structure of the refundable American Opportunity Tax Credit (AOTC) "is unnecessarily complicated." A consolidated tax credit could be better targeted than the current tax credits, which often provide a smaller benefit to low-income students, and could have lower income eligibility limits. Targeting could be improved by "allowing grant aid to be applied first to non-tuition expenses that are not covered by the tax credit," the authors wrote.
A consolidated tax credit should also feature a lifetime dollar limit, rather than a four-year limit, which could allow for a more equitable distribution of subsidies. And while a consolidated credit "may serve as an important function," Baum and Johnson wrote that “expanding it is not the optimal use of federal dollars for subsidizing students.”
Publication Date: 2/5/2016