Income-Based Repayment Becoming a Costly Solution to Student Loan Debt

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Yves here. I’m not running this post because I agree with the proposal. In fact, quite the reverse. The perceived need to come up with complicated schemes like “income-based repayment” for the student loan doomsday machine is yet another proof that radical reform is needed, both in terms of approaches to cutting debt loads and greatly reducing higher education costs.

I’m also bothered by facile generalizations like, “But most of the borrowers with large student debt burdens tend to be professionals with graduate degrees and reasonably high incomes.” First, some of the people who ought to have had the student debt math work get hit with serious illnesses which force them into bankruptcy….yet they can’t get rid of the student debt, plus the disease likely caused a career interruption or detour which also put them on a permanently lower earnings path. Second, vets have very high cost educations, and don’t earn particularly high incomes. Student debt burdens are a significant reason for the high rate of suicides among vets. Third, what about students who got those shiny advanced degrees and graduated in June 2008? Tons of offers were rescinded when the crisis hit.

By Robert Kelchen, Associate Professor of Higher Education, Seton Hall University. Originally published at openDemocracy

When Congress established the income-driven repayment for federal student loans back in 2007, it was touted as a way to help student loan borrowers save money by capping monthly payments at a certain percentage of a borrower’s income.

Since then, student loan debt has risen from US$500 billion to where it is now approaching the $1.5 trillion threshold. The federal government expects to forgive over $100 billion of the $350 billion in loans under income-driven repayment as of 2015. That means taxpayers are picking up the bill.

This has put the entire income-driven repayment system in jeopardy as there have been proposals by congressional Republicans and the Trump administration to reduce the amount of loans forgiven and end the Public Service Loan Forgiveness program, which is a special repayment option for people in public service fields. So far, these proposals have failed to become law, but expect to see them put forth again in the future as concerns about program costs continue to grow.

As a researcher who specializes in higher education policy and financial aid, here are some of my insights on how income-driven repayment works, why its future is now in jeopardy and some potential options that can protect the most vulnerable borrowers while also helping taxpayers.

How It Works

Six months after they leave college, students who took out a federal student loan are automatically put into a repayment plan with fixed monthly payments over 10 years. This is similar to how mortgages and car loans work. However, repayment can often be a major burden for student loan borrowers who take low-paying jobs or struggle to find employment after college.

To address this issue, Congress and the Department of Education created a number of options during the George W. Bush and Barack Obama presidencies that tied student loan borrowers’ payments to their discretionary income, that is, how much money they have left after meeting their basic needs.

Most students who take out federal loans today qualify for a plan called Pay As You Earn. This plan – known as PAYE – limits monthly payments to 10% of a student loan borrower’s discretionary income for up to 20 years.

There are two requirements. First, student loan borrowers must fill out paperwork each year with their income to be eligible for income-driven repayment. In recent years, more than half of federal student loan borrowers have failed to complete the paperwork on time, putting them back into the standard plan. Second, if any part of the loan is not repaid within 20 years, the remaining balance is forgiven. But this forgiveness counts as income and taxes must be paid on it in that year.

Borrowers who work for government agencies and certain nonprofit organizations can qualify for Public Service Loan Forgiveness, which limits payments to 10% of discretionary income for as little as ten years with no income tax penalty. So far, just 1% of borrowers who applied for forgiveness have had their loans forgiven, but this rate will likely increase over time as the Department of Education gets better at managing the forgiveness process.

Problems Abound

In some respects, the biggest problem with income-driven repayment is that too many people are taking advantage of it.

The share of students who reduced their loan balances by even one dollar within five years of leaving college has fallen from 67% to 51% over the last five years as low monthly payments under income-driven repayment mean that many borrowers’ balances are growing instead of shrinking. This has increased the projected price tag of these programs to the federal government well beyond expectations.

These programs tend to be used more frequently by borrowers with large debt burdens – especially those who have more than $100,000 in debt. Data from the Department of Education show that students who owe $100,000 or more make up just over one-third of all outstanding student debt but nearly half of all borrowers in income-driven repayment.

Trying to pay back $100,000 in student loans is certainly not easy, and I can speak from experience thanks to my wife’s law school debt. But most of the borrowers with large student debt burdens tend to be professionals with graduate degrees and reasonably high incomes. Many of the borrowers who have the greatest difficulty repaying their loans never earned a college degree and thus did not see substantial financial benefits from their investment.

What Can Be Done?

As a researcher of student financial aid, my concern is that policymakers might throw the proverbial baby out with the bathwater and get rid of the entire income-driven repayment system.

In my view, a better way to stop borrowers with $100,000 in debt from getting most of the benefits is to limit the amount forgiven. This can be done by capping the amount of loans that can be repaid through income-based repayment or extending the repayment term.

President Obama proposed limiting Public Service Loan Forgiveness to the first $57,500 in loans, although this did not pass Congress. His administration also implemented a program that required graduate students to pay for five more years than undergraduate students.

The savings from requiring higher-income borrowers with large loans to repay more of their loans can then be used to help the most vulnerable borrowers. Students who dropped out of college after a semester or two could see their debt forgiven more quickly and without having to pay additional income taxes. This may be a tough political sell, but this could also encourage students – especially those who are the first in their families to attend college – to give college a shot.

Some of the money could also be used to support larger Pell Grants to reduce the need for borrowing in the first place. Cutting the total amount of loans forgiven in half would allow for an increase of about 20%, or $1,200 per year, in the maximum Pell Grant, which is $6,195 for the 2019-2020 academic year. This would help cover much of the tuition increases over the last decade and reduce student loan debt.

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32 comments

  1. notabanker

    What can be done? Gee, what can be done?

    How about having the Fed buy all the student debt loan paper at par without interest and capping the cost of college education at $10,000 per year? How would the esteemed Associate Professor from Seton Hall feel about that? Because I can tell the esteemed professor how I feel about having spent 75% of my lifetime savings sending kids through college in the US, and he likely wouldn’t enjoy the conversation much. And I’m one of the most very fortunate ones.
    I cannot imagine sending a kid out into the wild with $250K in debt on their back, it’s criminal that society would consider it.

    Reply
    1. Fraibert

      The whole article is essentially so much fretting about the details because the author wants and needs the higher education gravy train to continue–and he is well-aware that it will crash faster if income-based repayment gets killed.

      I also find it darkly hypocritical that the Professor is fuming at individuals who have greater than $100,000 in student loan debt, when his own institution (formidably ranked as the 139th best national university by U.S. News) believes that the fair market price of its product (i.e., tuition and fees for 2019) is almost $44,000 per year. (I am aware that there is significant “discounting” in the form of “scholarships” but taking that approach to pricing is a form of attempting to prevent a market price correction.)

      Reply
  2. taunger

    This deserves a thorough eviceration, but I’ll leave it at this: maybe eligibility redetermination rates are low not because borrowers fail to submit, but because servicers fail to process.

    Reply
  3. Slam

    This level of economic servitude reflects the lack of attention the American people pay to creating an educated population. Criminal is the level of interest these loans accumulate before they are paid off. Just check out the graduate student loan rates at over 11% which are based on the Libor rate. Are we reaping what we sow?

    Reply
  4. Synoia

    So far, just 1% of borrowers who applied for forgiveness have had their loans forgiven, but this rate will likely increase over time as the Department of Education gets better at managing the forgiveness process.

    Are we seeing the Dept of Ed is already managing the program well?

    Reply
  5. Prabhar

    College enrollment rates of high school graduates have risen to 70+ percent.

    See BLS data.

    Pushing this rate into the 80th percentile demands creativity and resources.

    A combination of tactics — debt forgiveness, garnishment of future wages, increased taxpayer support for education, mandatory enrollment — will be needed so that the country can continue to advance.

    The question is how to effect the advance sooner rather than later.

    Reply
    1. Duck1

      “Pushing this rate into the 80th percentile demands creativity and resources.”

      Or, perhaps madness and delusion.

      Reply
      1. GM

        What will happen to the class filter

        “The class filter” has not changed at all.

        Everyone going to college means the vast majority of people going to no-name institutions with no resources and infrastructure.

        Meanwhile the small MIT/Stanford/Harvard/etc. group of elite research universities remains in the same place in the hierarchy as it always was.

        Somewhat ironically, those are actually the only places that you can get a free education (because of very generous financial aid made possible by huge endowments). If you are poor, of course. If you are middle to upper middle class, you are kind of screwed. And, of course, most people who get in those places are not poor. And many were not necessarily selected for their academic abilities.

        But still, that option exists.

        Back to the “filter” though — what needs a lot more attention IMHO is that the “class filter” is really operating at the high school level.

        In the US, where you live is very closely tied to your income and it also determines what school your kids go to. So you have extremely well-funded high schools in wealthy areas, mostly attended by kids of rich people who are often already highly educated themselves, and that creates a self-perpetuating cycle of segregation.

        And vice versa with respect to the poor schools.

        And, which is the most tragic part, if you are a gifted kid from a poor area you don’t have the option of attending one of the good high schools, because of geographic segregation.

        Something that is not the case in other countries.

        This is where the filter operates.

        If one is serious about eliminating unfair educational disparities, they would be advocating for abolishing school districts, banning private high schools and moving towards a system of centralized funding of schools so that all of them are equally funded and supported and so that anyone can go to any school of their choosing.

        But notice how many times you have heard that being discussed?

        Reply
        1. David Green

          “Everyone going to college means the vast majority of people going to no-name institutions with no resources and infrastructure.”

          Somewhat harsh in terms of those who labor in those institutions, but I can see where you’re coming from, especially in terms of the slow deaths of liberal arts and minor state institutions; e.g., Eastern Illinois University near where I live.

          Regarding the Ivys, make them public institutions in whatever state system they happen to reside. Regarding all state institutions, end big-time sports and perhaps the frat/sorority system. Also end administrative salaries above 200K. For starters.

          Make a year-long liberal arts curriculum mandatory for Fresh persons.

          Reply
          1. GM

            Also end administrative salaries above 200K. For starters.

            It will have to be “for starters” indeed, because probably the biggest factor behind costs ballooning the way they have been is the expansion of the administration, and most of that expansion was not 200K+ salaries, but a whole lot of positions in the 100K range.

            But that one will be hugely problematic to pull off because the whole system is now run by administrators, the faculty has lost all power except for a few tiny specialized institutions here and there.

            And the trends are towards further and further administrative bloat. As a perfect illustration of it, all the “diversity and inclusion” bullshit that is being pushed forward and all the policing of behavior that is constantly advocated for has a gigantic cost in terms of hiring more and more administrators (some big universities are paying literally hundreds of people to staff the various offices dealing with “harassment”, “discrimination”, Title IX, and other BS of the sort). And that’s just one aspect of it.

            Reply
    2. tegnost

      will be needed so that the country can continue to advance.

      Advance to where? More inequality and debt servitude? Could it be that more kids going to college is the result of no other options? Increasing the number of indebted citizens for lower paying or non existent jobs? As the Palast article shows, the people who matter don’t compete, they cut in the front of the line and those who go about it honestly are playing for the second string. Student loans should be seen as the barrier to advancement that I see them to be, after all, I doubt rich peoples kids are taking out student loans unless their parents have figured out a way to game that, too.

      https://www.theguardian.com/education/2016/oct/01/student-loans-increasing-rich-poor-divide

      FTA…Antonucci found it was not just students from lower socioeconomic backgrounds who struggled, but also the so-called “squeezed middle”, leaving only a small group from wealthier backgrounds who enjoy a positive outcome from higher education.

      Reply
  6. James

    ”Student debt burdens are a significant reason for the high rate of suicides among vets.”

    Source? Vets have the GI bill which puts them well ahead of most students, re. ability to pay. No?

    Reply
    1. Yves Smith Post author

      Veterinarians. The context is professionals who accrue more than $100k in debt.

      See for instance:

      There are also financial struggles, particularly for young people entering the field. Veterinary students in the U.S. graduated in 2018 with an average of $150,000 in debt, according to the AVMA. Yet data from the Bureau of Labor Statistics shows the median annual wage for veterinarians in 2018 was $93,830, and starting salaries are significantly much lower. When Dr. Molly McAllister, 43, of Portland, Oregon, first entered the field in 2004, she took a veterinarian job for $22,000 a year with $90,000 in debt from just veterinary school. “I was really well-educated on how to take care of animals. I was not well-educated on how to take care of myself,” she says.

      https://time.com/5670965/veterinarian-suicide-help/

      Reply
      1. Shonde

        Another area of stress on veterinarians is private equity buying up private vet practices and putting the vets on commission. Can you imagine the stress on a newly graduated vet with a load of student debt realizing the only way they are going to be able to make their student loan payment is to become a sales person and up sell expensive probably unnecessary procedures?
        One could say I was paying for student debt when my vet bills skyrocketed after the takeover since all the seasoned vets left and were replaced with new young faces.

        Reply
  7. Katy

    This article is so enraging, it’s hard to know where to begin.

    In my view, a better way to stop borrowers with $100,000 in debt from getting most of the benefits is to limit the amount forgiven.

    There are so many things wrong with this. First, this statement relies on his assumption that “most of the borrowers with large student debt burdens tend to be professionals with graduate degrees and reasonably high incomes.” What, like lawyers? Lawyer income has two income distributions (if you can get a job as an attorney at all after you graduate, which many can’t). His wife must be one of the rich lawyers.

    Second, what does he mean by “getting most of the benefits”? Does he simply mean “have the highest number of dollars in debt canceled”? Yes, if we canceled all of the debt, people who have high balances would have the highest number of dollars canceled. That’s elementary.

    But that isn’t what he said. His literal statement is that the people who have the highest amount of debt should be limited in the amount of debt relief they are allowed to receive.

    But isn’t it more likely that the people who have the highest amount of debt are most in need of having their debt forgiven? If you’re not one of the lucky ones who has a high salary at the end of law school, you are going to be struggling to pay your debt for many, many years.

    Federal grad school loans can have an interest rate of 7%. So paying off just the interest on a $100,000 loan is $7,000 per year. On an income-driven repayment plan, your loan balance might grow every year because the payments don’t cover the entire amount of interest.

    Third, his argument assumes that if someone has $100,000 in student loans, they received an education that was worth $100,000. This is a false assumption. Tuition at my dinky little low-tier law school is $45,000 per year. If you go to school for two years, then get sick or can’t finish law school, you’re stuck with $100,000 in debt and no law degree. Go ahead and tell me that person doesn’t deserve to have their debt forgiven.

    Reply
  8. Off The Street

    Complicated schemes typically strike me as being crafted first to provide talking points for politicians, and then in a distant second, if at all, to attempt to recognize and draft some semblance of a program that has been thoroughly analyzed for quaint notions like equity, contingencies, interaction with other legislation and such. They come across like the camel as a horse designed by a committee, only worse, as a camel functions.

    Reply
  9. Dan

    How about the costs of environmental degradation added to the income taxes of corporations, or at least subtracted from their tax refund maneuvers?

    Reply
  10. Sean

    If your going to talk about student loan financing a good place to start is Professor Susan Dynarski from University of Michigan. https://scholar.google.com/citations?user=nLR_FUYAAAAJ&hl=en

    One of her research findings has shown that it is not the level of debt that matters but the mechanism for which student debt is issued/offered and recovered.
    https://www.brookings.edu/research/the-trouble-with-student-loans-low-earnings-not-high-debt/

    The Kelchen article above fails to mention the use of Income Contingent Loans in Australia & UK. Where non-payment is shouldered by the government. See: https://www.nytimes.com/2016/07/10/upshot/america-can-fix-its-student-loan-crisis-just-ask-australia.html

    Importantly, in Aust the real rate of interest applied to income contingent loans for students is *zero*. So debt does not grow in real terms.

    That said. University student fees in Aust & UK are capped. Which both reduces the loan burden on students but also increases the likelihood of repayment for the government. When fees aren’t regulated experience has shown in Aust (deregulation was tried in Vocational Education & Training and was a disaster) that you get perverse market outcomes where the crappiest degrees cost more than their equivalent quality degrees. Similar dynamics occur in the US in the case of for-profit online degree universities vs non-profit equivalents.

    So there are two key issues for income contigent loans & student loans in general: one is the mechanism for the provision and recovery of student loans, and the other is maintaining a tight nexus between fees charged & quality of degree obtained.

    Reply
  11. HarrisonBergeron

    Yves, this is probably the first article I’ve seen on here that I’m disappointed in. I’ve got a grad degree, owe $250k and haven’t made more than $70k(one year) since I graduated in 2012. These types of articles aren’t even close to addressing reality. I know because in a tragic ironic twist I had to take a job as a debt collector for defaulted student loans. I’d hazard to guess I and the other poster know much more about student loans than the author if this article. I’ll happily write a tear down of it, I find it that bad.

    Reply
    1. Yves Smith Post author

      You start with a reading comprehension fail. I said at the very top I disagreed with it. Then you don’t offer a rebuttal. You instead try argument from authority.

      This site’s mission is critical thinking, not pandering to reader preferences. This article was first published on The Conversation, a well-regarded site. The author’s position would be regarded as sound in policy circles. If you don’t like this sort of thing, you need to be able to argue against it, not just say you don’t like it and assert you know better.

      Reply
      1. HarrisonBergeron

        I should have written something different. For that I apologize. I did miss the part where you disagreed with the article. A better argument I should have made is that the change to near total federal control of student loans was a cynical backdoor fiscal stimulus. The weighted average interest rate of the total federal student loan portfolio is greater than either any generally used measure of inflation or wage growth. As is noted in the article a significant portion of outstanding loans are negatively amortizing and will continue to do so if not accelerate in that direction. With these forces acting in the economy the loans will continue to grow or alternately if there is suffice wage growth to start paying them down in a meaningful way those payments will function as an increase in income tax and create a drag on economic growth. If this were the situation for a company or individual bankruptcy might be an option. This is not case for this system. The center cannot hold. The lesson I learned from the GFC is that the real losers were the people who purchased homes within their budgets, probably not in the location they desired, with a 20% down payment lost their jobs and were foreclosed on anyway( or went through significant hardship in spite of prudent planning). The Federal Government has unleashed a monster of distorted moral hazard. I personally knew this full well when I took out six figures in student loans. In student loans the government offers a Martingale situation at each turn, HS, College, Grad school. If it doesn’t pay out you double down and go back to school. This system is doomed to fail based on the math, growth and economic realities. I’m not a dead beat but watching the GFC I learned that suckers play by the rules and (economic) winners “move fast and break things.” Yves, I hope this clarifies this, I had no intention to disparage you or the site. I’m extremely grateful that this place is here.

        Reply
  12. Pscle

    The problem with working for a non-profit is that many of these positions are not full-time and this will disqualify you from the loan forgiveness program. I work in the mental health care field with a graduate degree, a credential, and I am pre-licensed. I am in the process of earning the last 1000 out of 3000 post-degree hours required for licensure. I have earned these part-time hours in low paid internships for the last 4 years while also working as an adjunct at a state university, which I rely on for my health insurance. Interest on my student loans has accumulated to the point that I now have over $100,000 in loans. Since I was also a re-entry student, going back to school at the age of 40 when I first took out loans, I don’t expect to live long enough to pay off my student loans.

    Reply
  13. The Rev Kev

    This article sounds more like a how-to-squeeze-blood-out-of-a-stone type article. I wonder what would happen if you did a breakdown of the average student debt to see how it got that way. How much of it went to supporting the sports programs including multi-million dollar payments to coaches, how much went to administration, how much went to supporting sending staff away to conferences and the like.
    It is clear that the students aren’t benefiting financially from their time at college nor are their teachers who should be well paid. So for the average debt of a student, just where exactly did all that debt come from anyway? Who benefited? I think that if you answer that question that it will be very revealing indeed.

    Reply
  14. cnchal

    > This is similar to how mortgages and car loans work. Nonsense.

    One can sell the house to get out of a mortgage or sell the car to get out of a loan in a relatively short time period

    How are you going to sell your education, after you were sold $100,000 of shiny education, and as soon as you drive it off the university lot, find it worthless?

    Reply
  15. Alexandra

    TL;DR version: Academia is a broken system in so many ways, one of which is that an advanced degree almost always requires a grad student to take loans to fund their research, but then even if you are one of the lucky few who will someday advance to the elusive full professorship, it’ll take at least a good 25 years to get there.

    Ph.D.s who potentially could go on to high-paying positions (1) spend years on the job market as adjuncts and visiting profs, often having to relocate all over the country every year or two (sometimes struggling to live in very expensive areas they aren’t paid enough for, but it was the only position open); (2) are seldom able to find tenure-track positions since those are being cut left and right; and (3) if they do manage to secure a TT position, then spend 6 years before they may be granted tenure. Even then it takes years to advance to a full professorship where they could expect to make about $100k–most people are at least in their 50s before that happens. So those loans are earning interest for a good 25 years before academics can even imagine paying them back at the standard repayment rate.

    And if you’re one of the people Yves mentioned whose potential high-earning career was derailed by illness, like me, or some other factor, you have to start all over at ground zero. I consider myself one of the luckier ones since at least I have a full-time job, working for a non-profit where I make around $17k per year. I was dismayed, though not surprised, to see that the promise of public service loan forgiveness is being broken 99% of the time.

    Reply
  16. Bob Hertz

    Several observations:

    1. Why should federal student loans have any interest rate at all?

    Partly because Americans are foolish about this and expect interest rates on anything;

    and partly to maintain the accounting fiction that federal loans will pay for themselves and thus be budget- neutral in the long run.

    We would be much better off to make grants, not loans, and expense the grants in the year we make them.

    2. Why is the Department of Education sabotaging the loan forgiveness programs?

    Partly Republican spite, partly to protect the reputation of for-profits……..

    but also because the Department sees its primary role as protecting the taxpayers. We will need a Department of Education instead that defends borrowers. We the taxpayers authorized these awful loans, and like any creditor we must accept the responsibility for defaults.

    3. Increasing Pell Grants

    I favor this also, but my gosh Professor Kelchen has a bizarre way to pay for this! He would cut back on loan forgiveness to graduates who are already in trouble even if they have decent incomes.

    I would expand Pell Grants by the following steps:

    – stop making any new loans to majors in the arts, social work, religion, et al. Use some of that money for Pell Grants that can be vocational schools, where most graduates do earn a living wage..

    and…

    Just raise taxes in a progressive manner.

    Reply
  17. Sancho Panza

    It seems there is an unused weapon in this fight against higher ed costs – revoking non profit status. With tuition increases doubling the rate of inflation for years, there would seem to be legal merit in such a case.

    Reply
  18. Joe Well

    When I read centrists such as this, I get a strong feeling that they are sociopaths who are either numb to or pleased by the suffering of others. As Yves noted, he facilely generalizes away all the people who accumulate a mountain of unpayable student debt. At least conservatives have a coherent might-makes-right moral universe.

    Reply

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