NCPA - National Center for Policy Analysis

The Cost of Income-Based Student Loan Repayment Programs

April 23, 2014

Existing student loan repayment programs may be four times more costly than they need to be, say Beth Akers and Matthew Chingos, fellows at the Brookings Institution's Brown Center on Education Policy.

Federal loan borrowers can use income-based repayment programs, meaning that their monthly loan payments are not set at a fixed amount, rather they depend on their earnings. How well do these repayment schedules work for student loan borrowers?

  • The point of an income-based repayment program is to protect borrowers from being faced with unaffordable monthly payments.
  • Six months after student enrollment ends, borrowers must begin making payments on federal loans.
  • The first income-based repayment program for new student loan borrowers was established in 2007.
  • In 2010, the program was made even more generous, lowering the fraction of earnings to be spent on repayment to 10 percent.
  • The time period before loan forgiveness was shortened, from 25 years to 20 years.

Akers and Chingos calculate that the current Pay As You Earn (PAYE) program may cost up to four times as much as a more limited payback program that could still fulfill the goal of protecting borrowers from unaffordable payments.

  • Extended repayment -- the core component of these income-based payment programs -- accounts only for one-quarter to one-third of the total program costs.
  • This means that a $14 billion annual cost of PAYE could save $10 billion by scaling the program back to include only extended repayment.

Akers and Chingos also find that the vast majority of program benefits go to borrowers that attend more expensive schools. The concern is that income-based repayment programs incentivize students to attend more expensive colleges. Eliminating forgiveness provisions could solve this problem.

Source: Beth Akers and Matthew M. Chingos, "Student Loan Safety Nets: Estimating the Costs and Benefits of Income-Based Repayment," Brookings Institution, April 14, 2014.


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