The federal government has consistently hailed income-based repayment (IDR) as the best way for tens of millions of American student loan takers to repay student loans administered by the federal government.
But experts are questioning whether this system, which adjusts monthly loan payments to undergraduate students based on their income level, is fundamentally broken.
“Does income-based repayment really work? That’s the big question, ”Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, told Yahoo Finance. “Looking back, there were a lot of problems.”
‘Shockingly low cancellation fee ‘
IDR plans first emerged as an “income contingency payment plan” in 1994. Graduates with federal loans were able to repay the debt at levels that corresponded to their income that year.
After 25 years of repayment, if borrowers made payments consistently, the rest of their loans would be forgiven. Therefore, if the first IDR participants joined these plans in 1995, they would be eligible for cancellation in 2020. But it is not clear how many of them actually obtained forgiveness.
In 2009, the revenue contingency plan became the “revenue-based reimbursement plan” under an initiative undertaken by the Obama administration (and eventually became called “revenue-based reimbursement plans”). Part of this new package of repayment plans included a revised “Pay as you go” plan, which allowed the borrower’s loans to be forgiven after 20 years, instead of 25.
Therefore, the first IDR participants would have apparently been eligible for forgiveness in 2015.
But NCLC’s Yu, citing a request for public records from the Department of Education (ED), found that fewer than 20 IDR participants in total should be forgiven by the end of 2019.
“The shockingly low rate of cancellation of these borrowers’ loans foreshadows the widespread problems affecting millions of low-income borrowers,” said Yu in a recent article, “and is emblematic of the failure of the Department of [IDR] programs to provide the relief that Congress wanted for struggling borrowers when it approved the enabling statutes for those programs. “
Recognizing the complexities of the IDR system, the Trump administration has considered reforming the income-based repayment plan.
According to a budget proposal released in February, the government wanted to consolidate the five existing amortization plans into one and increase the percentage of revenue that the borrower would pay per month from 10% to 12.5%. Consequently, the cancellation would come after 15 years, instead of 20 years, for undergraduate students.
There are currently about seven million borrowers, with about $ 530 billion in outstanding student loans under IDR plans. The Congressional Budget Office estimated earlier this year that there was an increase in the number of people using these income-based plans, from about 12% of federal loans in 2010 to 45% in 2017.
Who uses income-based reimbursement?
IDR plans are attractive because they look safe.
Daniel Collier, an associate researcher at the WE Upjohn Institute for Employment Research who focuses on student loans, explained that there is an appeal to simply having to faithfully make 20 years of payments to receive forgiveness.
“There were previous narratives … that the most experienced borrowers were in these programs and were making the most of these programs for tax breaks and eventual forgiveness, they earn more,” he explained. “This is not the common registrant.”
Instead, Collier added, “it was middle-income people, people who earn just under the median or median income, who were enrolled in the income-based reimbursement.”
‘The system has been broken for too long’
While there are ways to fix this reimbursement system, Yu emphasized that the reform was unlikely to go far enough.
“A, it’s not working,” said Yu, “EB, it’s not really providing relief. We need cancellation and renovation … the system has been broken for a long time. “
Ashley Harrington, director of federal defense and senior adviser to the Center for Responsible Lending, noted that the IDR system is “complex” and “has several reimbursement plans that people are struggling with” because of how “it is difficult to stay and stay subscribers. ”
In addition, “we are in our ninth iteration of [IDR] at this point, ”said Mark Huelsman, associate director of policy and research at Demos, during a recent conference. “This thing is difficult and necessary to untangle … [but] we must really start again. “
The cancellation would allow the government to pay off bad debts, while providing an opportunity to rethink the way we finance higher education, according to Yu.
Huelsman added that the general cancellation of student debt, which several prominent Democrats are asking the Biden government for through executive action, would be “an admission that what we assume about this funding instrument is not true”.
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Aarthi is a reporter at Yahoo Finance. She can be reached at [email protected]. Follow her on Twitter @aarthiswami.
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