NCPA - National Center for Policy Analysis

The Great Student Loan Giveaway

October 29, 2012

In response to the growing anxiety over student debt, lawmakers are creating legislation that may mitigate the struggles of today's youth. Implemented in 2007, income-based repayment (IBR) was the first policy-package addressing this challenge, say Jason Delisle, the director of the Federal Education Budget Project, and Alex Holt, a program associate, at the New America Foundation.

  • IBR is a program that limits students' loan payments to a percentage of their income and forgives the remaining balance after a series of payments.
  • Given that the recent crisis has acutely impacted recent graduates, Congress revamped a new, more generous IBR program schedule in 2010.

The current administration has accelerated the rollout date for the new schedule to late 2012. The White House touts it as a solution to rising college costs and student financial burden. The aim is to help lower- and middle-income families struggling to repay their student loans.

IBR provides college graduates a safety net; however, sound principles do not always translate into good policies. It is crucial to get the micro-level details right.

  • If left unchanged, the program is set to provide huge financial windfalls to people who, far from being needy, are among the most financially well-off graduates in today's job market.
  • According to the New America Foundation, the framework reduces or eliminates the financial consequences a borrower would bear in incurring federal student loan debt once he reaches a debt level around $30,000 -- even if he expects to eventually earn a middle income or even a high income.
  • Moreover, if student opt to borrow less, the new IBR provides them with little to no benefit compared to the earlier framework.

The New America Foundation has developed a calculator to investigate into how various income groups are affected by the new IBR.

  • Lower income borrowers will experience the least amount of benefit from the unfolding changes. These individuals have income so low that a 15 to 10 percent discount roughly equals a reduction of $5 to $20 from their monthly payments.
  • Middle income borrowers will receive additional benefits, but only if they borrow the maximum amount of federal loans -- $31,000 for dependent undergraduates. Nonetheless, members of this group will end up paying more and for a longer time due to incurring interest rates.
  • Middle- and high-income borrowers who attend graduate and professional school will experience the most gain from the revamp.

Source: Jason Delisle and Alex Holt, "The Great Student Loan Giveaway," Economic Policies for the 21st Century, October 25, 2012. Jason Delisle and Alex Holt, "Safety Net or Windfall?" New America Foundation, October 16, 2012.


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