With 10% of student loan borrowers defaulting in the first two years of repayment and rates rising to as high as 23%, it’s important that we address the burgeoning student loan crisis. A consortium of interested parties including Young Invincibles, National Association of Student Financial Aid Administrators (NASFAA), Institute for Higher Education Policy (IHEP), New American Foundation and HCM Strategists have worked together to develop some strategies to help deal with student loans.
The study and results they present in their paper, Automatic for the Borrower: How Repayment Based on Income Can Reduce Loan Defaults and Manage Risk, include criticism of the design of the federal student loan system. They cite the complexity of the payment system, which features nine different options for repayment, leaving borrowers unsure which is best or how to enroll. They also discuss the challenges of the timing with the first payment due just six months after graduation when many have either not found employment or are earning a wage too low to support repayment.
The consortium has developed a concept they feel would better serve both the students that are in debt, as well as the taxpayers that pay the ultimate price if loans are not repaid. They call the plan auto-IBR. It works on three basic tenets:
#1 Auto enroll all federal student loan debtors into an income-based repayment plan (auto-IBR) upon leaving school
#2 Auto deduct student loan payments through employer withholding
#3 Hold institutions accountable for borrower’s ability to pay student debt
They admit in their analysis that this solution would not address college affordability or the ever-increasing amount of student loans, but it would address some critical parts of the student loan crisis. They suggest three different iterations of auto-IBR plans that would fulfill their goals. There are three because members of the consortium had differences of opinion on what the best approach would be.
#1 High-Exemption, High-Rate Plan
Income under $25,000 would be exempt for calculating the payment plan. Above the exemption, 18% of income would be due as student loan repayment. After 20 years of payments, remaining balances would be forgiven. This plan is most advantageous for low income borrowers because the income exemption is high. This would also lengthen repayment periods for those with low income because more interest would accrue and it would increase the balance forgiven – a distinct disadvantage if loan forgiveness continues to be taxable.
#2 Low-Exemption, Low-Rate Plan
Income under $10,000 would be exempt for calculating the payment plan. Above the exemption, 10% of income would be due for repayment. Borrowers who started repayment with less than $50,000 in debt would have forgiveness after 20 years of payment. For those who start out owing more than $50k, 30 years of repayment would be required for balances to be forgiven. This plan is less preferable for low income earners because of the lower exemption – even with the lower payment percentage. The higher payments would result in high and middle income borrowers paying back more.
#3 Multiple-Rate, Multiple-Exemption Plan
Individuals can exempt $12,000 of income and households of more than two people get to exempt $18,000 of income from the payment calculation. Borrowers earning less than $40k pay 10% of earning in excess of the exemption. Borrowers earning between $40k to $70k pay 12.5% above the exemption amount and borrowers earning more than $70k pay 15% above the exemption. Those that started out owing less than $60k get forgiveness after 20 years, and at 25 years for those that start out owing more. Although this plan is more complex, higher income earners would be (justly) required to pay more than modest earners.
One important feature of all of these plans is that they would not cap the payment at the 10 year standard plan level. Current IBR provisions mandate that under IBR you would not pay more than the standard 10 year plan amount – these plans would mandate that the percentage paid does not have a cap – this will prevent higher income earners from taking advantage. Their suggestions also allow an opt-out function that would let borrowers who are experiencing a financial hardship to request a time-out from auto deduct and would also allow you to pay directly rather than auto deduct. Self-employed could pay quarterly along with their taxes or make monthly payments.
These plans are interesting and seem fairer in many ways than the current Income Based Repayment (IBR) and Pay As You Earn (PAYE) plans. To read the entire report, click here. We would be interested in hearing from you here or on Facebook about what you think of these plans, the pros and cons and what you would see changed. Be sure to sign up for Tuition.io’s free student loan tool to track your loans and read our blog often for student loan news and tips.