Don’t Get Rid of the Income-Based Loan Repayment System. Fix It.

There is good reason to think that the next reauthorization of the Higher Education Act could include a significant rollback of the income-driven federal student-loan-repayment system that has developed over the past decade. The House Committee on Education and the Workforce has already proposed reducing some supports in the student-loan system, including forgiving balances borrowers cannot afford to repay, and recent signals from the Senate Committee on Health, Education, Labor, and Pensions suggest it might also move in this direction. A report earlier this year from the Education Department showed that the federal government was rapidly losing money from the increasingly popular plans.

Certainly, the system needs significant reform. But the basic structure — setting affordable payments based on borrowers’ current incomes and forgiving remaining debt after a specified number of years — is crucial to ensuring meaningful access to educational opportunities.

Many graduates in their first years after leaving college cannot afford the monthly payments associated with the standard 10-year fixed-payment plan. But if they can postpone or extend payments, they may eventually move into careers that will enable them to repay their entire debts. Income-driven repayment makes this possible.

Other borrowers, however, will never be able to manage the payments without undue hardship. They may not have completed their programs or they may have received a degree without real market value. Some may have chosen careers that demand personal sacrifice but don’t pay well, including those in public-service fields such as education or social work.

Of course, some of the most oppressive debt could be avoided if institutions with very poor outcomes were excluded from federal student-aid programs. But even if that were to happen, there would always be some borrowers for whom forgiveness of remaining debt after a reasonable period of affordable payments is the most sensible approach for avoiding lifelong indebtedness.

The importance of a strong income-driven repayment system does not mean that we should leave in place the hodgepodge of repayment programs with different requirements and benefits that has developed through a series of disjointed reforms. But doing away with all income-driven repayment — or even just with loan forgiveness — would be a serious setback. Instead, Congress should address the very real problems with the system and create an automatic loan-repayment program that is fair and efficient for both students and taxpayers.

Here are some ways to do that:

Create one income-driven repayment plan with clear requirements and provisions. Borrowers should be automatically enrolled in the plan when they start repaying. A number of other countries have succeeded with systems like this, and there is broad consensus that they work better than the current U.S. system. Payroll deductions for student-loan payments would make it easier for required payments to adjust quickly when financial circumstances change, and also make it easier for students to meet their payment responsibilities. In addition, it would make it harder for borrowers to put those payments low on their list of spending priorities.

Raise required payments as a share of discretionary income by a few percentage points. If the goal is to get borrowers to pay off their loans more quickly, this would be a reasonable approach that would have little or no impact on borrowers with low earnings. The newest income-driven repayment plans require that students pay 10 percent of the portion of their incomes that exceeds 150 percent of the poverty level for their family size, down from 15 percent in earlier plans. But at 10 percent, a borrower of $50,000 with a starting income of $40,000 would need over 20 years to repay the entire loan; at 15 percent, that borrower could repay the loan in 15 years.

As the total amount borrowed increases, extend the number of payments required to reach loan forgiveness. Under the current income-driven repayment system, two borrowers with similar incomes but very different levels of debt will have the same monthly payments and make the same number of payments before they are eligible for forgiveness. For example, a student who borrowed $40,000 and had a starting salary of $25,000 would, assuming 4 percent annual income increases, have some remaining debt forgiven after 20 years. A second student, who borrowed $50,000 and had the same starting salary and salary increases as the first student, would make the exact same monthly payments as the first student for 20 years, despite having borrowed $10,000 more, and then have a larger remaining debt forgiven. The second student should be required to make more payments before his debt is forgiven.

Place reasonable limits on graduate students’ federal borrowing. Unlike undergraduate students, graduate students can borrow a virtually unlimited amount under the Grad PLUS program and enroll all of their debt in income-driven repayment. One option would be to allow only Stafford loans, which are capped at $138,500, to qualify for an income-driven repayment plan.

Eliminate taxes on all forgiven loan balances. Subsidizing students who enter relatively low-paying but societally beneficial professions makes sense; introducing a loan-forgiveness program for graduates who go into public-service jobs has been a positive step. For those borrowers, loan-forgiveness amounts are not taxable, unlike ordinary income-driven-repayment forgiveness amounts. Making forgiveness amounts under both plans nontaxable and integrating them into a single program would bring equity to the system and eliminate the bureaucratic wrangling over which jobs qualify for more rapid forgiveness and the tax benefit and which do not.

The federal student-loan repayment system as it stands is broken and at risk of collapsing if it is not repaired. Strengthening income-driven repayment, eliminating both its excesses and its inadequacies, has the potential to help more students enroll in and complete programs that will improve their lives and benefit society. Maintaining modified provisions that link loan payments to income and eventually forgive the debt that borrowers cannot afford to repay even over the long run will make successfully completing college a realistic possibility for more students.

Sandy Baum is a nonresident fellow in the Education Policy Program at the Urban Institute and professor emerita of economics at Skidmore College.