The Obama administration's changes in the income-based repayment program for federal student loans will offer only marginal benefits to low-income borrowers but will be a boon for high-income borrowers who have big debts, according to an analysis released on Tuesday by the New America Foundation.
The program allows borrowers of federal loans to cap their monthly payments at a percentage of their annual discretionary income and have the loans forgiven after making payments for a certain period of time. Under the current rules, borrowers must pay at least 15 percent of their discretionary income and the government will pay off their remaining federal loans after 25 years of payments.
In 2010, Congress, at the urging of President Obama, changed the program so that borrowers would pay less each month (10 percent of discretionary income) and obtain loan forgiveness sooner (after 20 years of payments). Those changes were originally slated to take effect in 2014, but the Obama administration is using its executive authority to accelerate that timetable, and the new terms could be available to borrowers as soon as this year.
Mr. Obama's re-election campaign has touted the program in advertisements and speeches, framing it as an important component of the president's policies to ease the burden of student debt on young graduates and to make college more affordable to middle-class families. Last month the campaign started a Web site where voters can enter their income and federal student-loan debt into a calculator to see how much lower their monthly payments would be under the new income-based repayment plan.
But looking only at those lowered monthly payments provides little insight into how the changes in the income-based program will affect borrowers over the entire course of repayment, according to Jason Delisle and Alex Holt, the authors of the New America Foundation report. Mr. Delisle and Mr. Holt calculated the impact of the changes over the entire course of repayment, running hundreds of scenarios for different borrower profiles.
They found that while the changes in the income-based program will affect all borrowers, those with higher incomes and larger debts stand to benefit the most.
"If left unchanged," the report says, "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."
Helping People 'Most Able to Pay'
Low-income borrowers—those earning less than $25,000 a year—will see their monthly payments shrink by $5 to $20, the report says. However, high-income borrowers with high debt loads from, say, graduate or professional school will see hundreds of thousands of dollars of their loan debt forgiven after making payments for 20 years.
For instance, according to the analysis, a law-school graduate who has nearly $122,000 in outstanding federal loans and a $65,000 starting salary that grows to about $200,000 in 20 years will end up having about $23,000 of his or her debt forgiven under the current program. Under the new program, though, the borrower will end up having to pay roughly half as much, and the government will forgive more than $160,000 of the outstanding debt.
"We don't think this program is going to do what it was intended to do," Mr. Holt said. "This is a back-loaded benefit, and it's helping people who are most able to pay. The question we need to ask is whether this is how we want the government appropriating money."
For example, Mr. Holt said, the maximum amount of Pell Grant money that the neediest undergraduate can receive is $23,000 over four years. But students who take out large loans for graduate school (which, unlike federal undergraduate loans, are limited only by the cost of attendance) and then get high-paying jobs would see hundreds of thousands of dollars of their loan debt forgiven.
With those changes, graduate and professional schools will have little incentive to keep costs low because their students will be able to take on large loan debts without ultimately incurring the cost.
The New American Foundation study found that under the new income-based repayment rules, high-income borrowers will not incur any incremental cost in borrowing an additional dollar after they reach $60,000 in loans even if they have a six-figure income over most of their repayment term.
"You've essentially created," Mr. Delisle said, "what is basically a risk-free proposition" for students wanting to take out huge loans to attend expensive graduate programs.
The report urges policy makers to adopt several recommendations, such as limiting the scope of some of the new, more generous income-based repayment provisions and tightening the eligibility for loan forgiveness for high-income borrowers.