The Orwellian Income Based Repayment Program

The name of the newest student loan repayment program – Income Based Repayment (IBR) – is an Orwellian abuse of language. It implies that student loans will be repaid, but under IBR, – typical undergraduate borrowers will not repay their loans.

And changes to IBR that are going into effect soon mean they will repay even less. We know this courtesy of the awesome calculator that the New America Foundation released to accompany their recent report on IBR. When you enter the amount of debt a graduate has and an earnings projection, the calculator tells you the student’s monthly payments, how much they repay over the lifetime of the loan, and how much of their loan is forgiven.

The average student who takes out student loans graduates with $26,600 of student loan debt. The median earnings for new college graduates is $27,000 (table 2 here). Based on the typical yearly growth in salary of bachelor’s degree holders, we’ll assume their salary grows by 3% a year. To pay off the debt in the standard (10 year) plan, their monthly payment would be $307. But under IBR, their monthly payment in the first year drops to $63, which doesn’t even cover the interest on the loans (meaning their balance is growing over time). Over the 20 year life of the loan, they will repay less than what they borrowed (<$23,000), and will have over $40,000 of debt forgiven (paid by taxpayers).

Even if their starting salary is $35,000, they will still end up having $20,000 of debt forgiven. Moreover, borrowers who become parents during their loan repayment will find their monthly payments are reduced drastically. If the $35,000 starting salary graduate has children 5 and 7 years into repayment, they will repay much less than the principal of the loan (total payments <$18,000) and will have more than $45,000 of debt forgiven (paid by taxpayers). Having children lowers payments so much that even a graduate that has a high starting salary of $45,000 and children 5 and 7 years into repayment will have just under $16,000 of their debt forgiven (paid by taxpayers).

The key lesson in all of this is that the typical student borrower with typical earnings will not repay their student loans. Many of them won’t even repay the principal, let alone the interest, so to call IBR a student loan repayment program is to ignore the definition of repay.

One of the reasons this is such a big deal is because IBR is giving income contingent lending (ICL) a bad name. ICL done right provides borrowers with a more flexible way to repay their loans (see here and here for good primers on ICL) and should be the future of student lending in this country. But IBR has so badly mangled the idea of ICL that they barely resemble each other at all. IBR is a delayed grant program, whereas ICL is a student loan program (and a much better one than what we currently have).

There is also the issue of priorities. IBR ensures that many typical upper middle class students will get a (delayed) grant of $40,000 (and higher – see Jason and Alex’s examples) courtesy of IBR, whereas many low income students will only get around $22,000 in (immediate) Pell grants. At a time when student financial aid dollars are scarce, this seems to be setting the wrong priorities.

All of this is yet more evidence that IBR should be ended immediately.

Photo Credit: New America Foundation