Income-Based Repayment: A Closer Look

President Barack Obama’s plan for more flexible student loan repayment options is earning praise from many education advocates—and those watching the Occupy Wall Street protests—while conservatives are labeling it as another policy that encourages colleges to raise tuition.

The plan, unveiled in late October, would allow future borrowers to limit repayments to no more than 10 percent of their discretionary income. As a result, supporters say new graduates will get some relief if they have difficulty finding work in the struggling U.S. job market.

“These are meaningful steps that will benefit millions of loan borrowers,” said Pauline Abernathy, vice president of The Institute for College Access and Success, or TICAS.

Most students at four-year colleges are taking out loans to pay tuition, and college seniors graduated in 2009 with an average debt of $24,000, according to the institute.

The Obama plan would make income-based repayment, or IBR, more generous to students who select this option. Under current law, those in IBR pay 15 percent of their discretionary income, with any remaining loan balance canceled after 25 years. In addition to lowering the payment threshold to 10 percent, the new plan, called Pay as You Earn, would cancel any remaining balance after 20 years.

The Education Department says graduates earning $40,000 to $50,000 a year could reduce loan payments by more than 60 percent under the plan, depending on the size of their debts.

The new initiative also may pay some political dividends for the White House, as many youths in the Occupy Wall Street protests have identified student loan debt as a significant problem. Those who left comments at the Occupy Wall Street website listed forgiveness of student loan debt among proposed demands, while some of those profiled at the wearethe99percent.com website cited high levels of student debt as one reason for their involvement.

Rich Williams, higher education advocate for the U.S. Public Interest Research Group, or PIRG, told Diverse that the move by the White House “is a positive step, but more needs to be done on student debt.”

For example, the new policy does not affect private loans, non-federal borrowing outside the federal system. Among those with private loans, 54 percent have not exhausted their limit on federal loans—an indication that more consumer education may be needed.

The Obama administration wants to address this issue as well by providing more information—and having colleges offer more guidance—on government and private student loans. The new plan would enlist the help of the new federal Bureau of Consumer Financial Protection in trying to educate the public on student loan options.

The White House changes also come amid data that show Americans owe more in student loans than credit card debt.

According to TICAS, more than 200,000 students owe at least $40,000—up from just 23,000 students who had such debt levels in 1996.

While tuition increases are one factor in this trend, another is the decision by cash-strapped states to cut back on investments in higher education, Williams told Diverse.

“We have more states disinvesting in higher education,” he said. In 2000, family contributions surpassed state spending on higher education in only three states. By 2011, the number had increased to 19.

But the Obama plan faces criticism from Republicans. Among the GOP presidential candidates, Rep. Ron Paul, R-Texas, has called for eliminating all federal student loans. Neal McCluskey, education analyst at the libertarian Cato Institute, said the new policy moves closer to the idea championed by Occupy Wall Street protesters to forgive all student loans.

The new policy “is not a whole lot of help, but it sends a signal that the administration might consider total loan forgiveness,” McCluskey told Diverse.

McCluskey also said federal student aid—both grants and loans—encouraged colleges to raise tuition. “If you give students an extra dollar of aid, colleges will increase tuition by a dollar. It’s a vicious cycle,” he said.

U.S. PIRG’s Williams disputed that claim, noting that, at least since 2006, Congress had increased financial aid spending at rates above net increases in college tuition.

He also argued that IBR, rather than encouraging loan forgiveness, provides a useful bridge for recent graduates as they get established in the working world.

Most students in income-based repayment do pay off their loans, he said.

In fact, they may end up paying for a longer time than the usual 10-year repayment period for student loans.

“Most students will rely on it [IBR] for about 10 years until they establish themselves,” he said.

Abernathy agreed that students in IBR eventually would pay off their loans. Currently, she said, students who enroll in the program give the Education Department permission to verify their income with the Internal Revenue Service at regular intervals to update repayment plans.

However, education advocates agree that more outreach and marketing will help publicize income-based repayment.

Approximately 450,000 borrowers make use of current initiatives, Abernathy said, though this is up from 350,000 in April 2011.

“It’s still a relatively new program,” she said. Supporters of the new plan say it could help as many as 1.6 million borrowers.

While welcoming expansion of income-based repayment, the Association of Private Sector Colleges and Universities, or APSCU, said IBR policies leave questions.

“Unfortunately, current Department of Education regulations do not always allow payments made through the IBR plan to count in the recently imposed gainful employment repayment calculation,” said Brian Moran, APSCU interim president. “We view that as a policy disconnect that should immediately be rectified.”