President Obama’s fiscal year 2015 budget request proposes key changes to the Income Based Repayment program for federal student loans. The changes will help make the program more fiscally and politically sustainable.
Over the last few years we’ve sounded the alarm that changes the Obama administration made to Income-Based Repayment overwhelmingly benefit graduate students and allow borrowers earning high incomes to qualify for loan forgiveness. The changes also exacerbated a loophole in the student loan program where schools combine the unlimited benefits of Public Service Loan Forgiveness with unlimited borrowing under the Grad PLUS program to capture windfall taxpayer subsidies for themselves and their graduate and professional students.
Because we believe IBR should be the foundation of a more streamlined repayment system — one in which all borrowers would be automatically eligible to make a minimum monthly payment based on their incomes — we proposed a series of changes to rein in IBR’s windfall benefits (here, here, and here). At its current level of benefits, the program is only sustainable so long as it remains complicated and opt in, as those features minimize both the costs and visibility of its lopsided benefits.
The president’s fiscal year 2015 budget includes a number of the reforms we’ve recommended, such as a new loan forgiveness threshold for borrowers with high levels of debt and a cap on Public Sector Loan Forgiveness. It closes a loophole that allowed married borrowers to exclude their spouse’s income from the IBR calculation. And it uses the savings generated by the proposals to expand access to IBR — though it doesn’t make it an automatic and universal repayment plan like we have advocated.
Below is an outline of the problems in the current IBR terms that we have identified in the past, the changes we recommended to address them, and the proposals announced in the president’s fiscal year 2015 budget. A follow-up post explaining the changes more fully is here.
FY 2015 Budget Request
|10-year Public Service Loan Forgiveness is unlimited, and so are graduate loans. (“Georgetown Law Loophole”).||Cap Public Service Loan Forgiveness at $30,000, corresponding to the maximum in Pell Grant aid a student could ever receive.||Includes cap, but at $57,500.|
|Disproportionate benefits for graduate students and high income borrowers.||Create two-tiered loan forgiveness: 20 years for initial balances less than $40,000, and 25 years for those above $40,000.||Same as New America proposal, except tier is triggered at $57,500 in debt.|
|Disproportionate benefits for graduate students and high income borrowers.||Create a higher payment rate for borrowers earning more than $35,000 a year.||None.|
|Borrowers' payments are capped when monthly payment equals payment on 10-year term based on original loan balance. As income increases, payments stay flat, boosting loan forgiveness.||Eliminate payment cap. Payments are always based on income.||Same as New America proposal.|
|IBR currently allows married borrowers to pay based on their individual income, not household income. A borrower with $40,000 in income, but $150,000 in household income, makes payments based only on $40,000 income.||Make IBR payments for married borrowers based on combined household income (but halve household income if both are paying loans through IBR).||Same as New America proposal. (But unclear how two-borrower household would be treated).|
|Loan forgiveness (other than for public service) is taxable income.||Make loan forgiveness tax-free.||Same as New America proposal.|
|Confusing eligibility terms and borrowers are eligible for larger benefits depending on when they took out federal student loans, not whether they have them now.||Allow all borrowers to enroll in an IBR that meets these reformed terms.||Same as New America proposal.|