Blog Post | July 2, 2024

IDR Without Loan Discharge Can Be a Lifetime Debt Sentence for Low-Income Borrowers

Author: Michele Shepard Zampini and Ellie Bruecker, Ph.D.

Last week, two court rulings halted the Biden Administration’s full implementation of its SAVE repayment plan for federal student loan borrowers. As the litigation makes its way through the court system, the financial well-being of millions of borrowers hangs in the balance. One ruling halted the administration from discharging loans for borrowers enrolled in SAVE and raised questions about the broader role of loan discharge in the income-driven repayment (IDR) system, despite its clear basis in statute and in the historical record.

In response, we analyzed what an IDR system without discharge could look like for some borrowers: a lifetime debt sentence. This blog also includes a timeline showing the statutory and regulatory building blocks of the IDR system.

With nearly 13 million borrowers currently enrolled, IDR plans have provided a safety net for federal student loan borrowers for more than three decades.i For many borrowers, the monthly payment amount they would be required to make under a standard repayment plan is too high. IDR plans address this by allowing borrowers to instead make monthly payments in an amount based on their income and family size.ii

Because these lower income-based monthly payments can extend a borrower’s repayment term, IDR plans also provide a key protection: a light at the end of the tunnel. Instead of requiring borrowers to remain in the repayment system indefinitely, IDR plans discharge any debt that remains after a set number of income-based monthly payments (a maximum of 25 years’ worth, depending on the plan).

Without a discharge provision, many persistently low-income borrowers would be stuck in the repayment system indefinitely without hope of ever repaying their debt. Recognizing this, the “light at the end of the tunnel” has been accepted as a core tenet of IDR design for more than three decades and is reflected clearly in multiple instances of statute. IDR reform debates have historically focused not on whether to discharge debt for those whose incomes remain persistently low, but on the length of their maximum repayment period.

Timeline: Three Decades of IDR Plans Show Consistent Design Features

In 2023, the Education Department sought to improve the IDR system after years of urging from policymakers and advocates across the political spectrum to fix well-documented design flaws. The changes made in the SAVE plan reflect recommendations taken from extensive research demonstrating the struggles that borrowers faced in accessing IDR plans and avoiding default. Those changes build on nearly thirty years of consistent design features for IDR.

  • 1993: Law enacted to create an Income-Contingent Repayment (ICR) plan, under which a borrower’s monthly payments are based on a percentage of their income and any remaining debt is discharged after a certain number of payments. The statutory language creating the ICR plan gives the U.S. Department of Education broad discretion to define monthly payment amounts and maximum repayment terms.
  • 1994: The U.S. Department of Education promulgates regulations to implement the ICR plan.
  • 1995: ICR opens for enrollment.
  • 2007: Law enacted to create the Income-Based Repayment (IBR) plan (now called “Original IBR”), which provides for the discharge of any balance remaining after 25 years’ worth of payments.
  • 2009: “Original IBR” opens for enrollment.
  • 2010: Law enacted to update IBR terms to provide lower monthly payments and shorten maximum repayment period (20 years’ worth of payments); plan referred to as “New IBR.”
  • 2011-12: Using the statutory authority granted by the ICR statute, the U.S. Department of Education creates and implements the Pay as You Earn (PAYE) plan via the negotiated rulemaking process; PAYE provides for the discharge of any balance remaining after 20 years’ worth of payments.
  • 2014: “New IBR” opens for enrollment.
  • 2014-15: Using the statutory authority granted by the ICR statute, the U.S. Department of Education creates and implements the Revised Pay as You Earn (REPAYE) plan via the negotiated rulemaking process; REPAYE provides for the discharge of any balance remaining after 20 or 25 years’ worth of payments, depending on the loan type.
  • 2023-24: Using the statutory authority granted by the ICR statute, the U.S. Department of Education creates and implements the Saving on a Valuable Education (SAVE) plan via the negotiated rulemaking process; SAVE provides for the discharge of any balance remaining after 10-25 years of payments, depending on the original principal balance and the loan type. As part of the rulemaking process, the Department also sunsets new enrollments in two older repayment plans.

As of today, borrowers can choose from five remaining IDR plan options.iii All plans feature an income exclusion, varying from 150% to 225% of the federal poverty level. To see how repayment looks for differing incomes and family sizes at 225% of the federal poverty level, see our fact sheet on SAVE.

Repayment PlanEligibilityMonthly PaymentMaximum Repayment Term
SAVE (Saving on a Valuable Education) All Direct Loan borrowers; no partial financial hardship requirementFor borrowers with only undergraduate loans, 5% of discretionary income; for borrowers with a mix of undergraduate and graduate loans, a weighted average of between 5% and 10% of their income based upon the original principal balances of the loans; for borrowers with only graduate loans, 10% of discretionary incomeFor borrowers whose original principal loan balance was $12,000 or less, 10 years, with an additional 1 year added for each additional $1,000 borrowed above that level, up to a maximum of 20 years if repaying only undergraduate debt or 25 years if repaying any graduate debt
REPAYE (Revised Pay as You Earn)All Direct Loan borrowers; no partial financial hardship requirement10% of discretionary income20 years if repaying only undergraduate debt; 25 years if repaying any graduate debt
PAYE (Pay as You Earn)Direct Loan borrowers who took out their first loan after September 30, 2007 and at least one loan after September 30, 2011, and who demonstrate a partial financial hardship10% of discretionary income, up to the fixed 10-year payment amount20 years
Income-Based Repayment (New IBR)Borrowers who take out their first loan on or after July 1, 2014 and who demonstrate a partial financial hardship10% of discretionary income, up to the fixed 10-year payment amount20 years
Income-Based Repayment (Original IBR)All federal borrowers who demonstrate a partial financial hardship15% of discretionary income, up to the fixed 10-year payment amount25 years
Income-Contingent Repayment (ICR)All Direct Loan borrowers; no partial financial hardship requirementThe lesser of: 20% of discretionary income and 12-year repayment amount x income percentage factor25 years

Borrowers have a “partial financial hardship” if their calculated payment based on income and family size is less than what they would pay under the fixed 10-year repayment plan.
The SAVE Plan replaced the REPAYE Plan starting in Fall 2023.

IDR Was Designed to Protect Borrowers From a Lifetime of Debt

IDR’s “light at the end of the tunnel” is especially critical for borrowers whose incomes remain low over the course of their lives—often, individuals who did not complete a degree, and therefore received no financial benefit in return for their borrowing. For many such borrowers, their monthly income-based payments will never exceed $0. Without the safety valve of loan discharge, they will remain in repayment for the rest of their lives. For others, their payments may exceed $0, but only after several decades in the repayment system.

Low or $0 monthly payments do not mean that a persistent debt balance is not a problem. Borrowers can face significant bureaucratic hurdles to enrolling and staying enrolled in IDR plans, a challenge that SAVE was designed, in part, to fix. The longer a borrower is required to remain in the repayment system, the more likely they are to fall out of IDR, and the more likely they are to face the severe consequences of loan default; these risks have historically been compounded by servicing errors. Due to the impact of the racial wealth gap and persistent employment and wage discrimination, the negative effects of a persistent debt balance are also compounded for Black students.

We show below how two such borrowers would fare under an IDR system that provides no discharge.

How Persistently Low-Income Borrowers Would Fare Without Loan Discharge

In response to recent injunctions blocking the administration from implementing components of the SAVE plan—including its loan discharge provisions—we wanted to better understand how persistently low-income borrowers would fare under an IDR system that didn’t promise a “light at the end of the tunnel.”

Both examples are borrowers with low balances and low incomes: borrowers who took out small amounts of debt to pay for college, but either did not complete a degree or did not see the expected return on their investment. Borrowers A and B entered repayment with a $5,000 balance and a fixed interest rate of 4.21%. Borrowers A and B have a starting AGI of $32,000, which increases by 2.5% each year. Borrower A has a family size of one, while Borrower B has a family size of three.iv

Borrower A

Under the current parameters of the SAVE plan, borrowers with incomes below 225% of the federal poverty level have a $0 monthly payment. In addition, borrowers under SAVE are eligible for loan discharge after 10 years of repayment if they borrowed $12,000 or less (scaling up to a maximum repayment term of 25 years, depending on original balance and whether they borrowed to attend graduate school).

Under the SAVE plan, Borrower A’s adjusted gross income (AGI) does not exceed 225% of the federal poverty level in the first 10 years of repayment, so Borrower A has a $0 monthly payment for the duration of their repayment period and the entire $5,000 balance is discharged after 10 years.

In contrast, in a scenario where the SAVE plan does not provide for balance discharge after a certain number of payments, Borrower A would remain in repayment for nearly 60 years.

Under a version of the SAVE plan that does not include loan discharge, Borrower A has $0 monthly payments until the 24th year of repayment, and until the 41st year of repayment, those payments are lower than the monthly interest accrual on the loan. During this time, Borrower A makes no progress on paying down the balance of the loan, and the program subsidizes $6,766 in interest. Ultimately, Borrower A would spend more than 58 years in repayment on a $5,000 loan balance, paying $9,403 in total—nearly double the original balance.

The cost of more affordable monthly payments without loan discharge: nearly six decades in repayment.

Borrower ASAVE Plan (Original Implementation)SAVE Plan Without Balance Discharge
Original Balance$5,000 $5,000
Balance After 10 Years$5,000 $5,000
Balance After 25 Years$5,000
Balance After 50 Years$3,832
Total Amount Paid$0 $9,403
Years in Repayment (Including $0 Payments)1058.5

Borrower B

Like Borrower A, Borrower B’s AGI does not exceed 225% of the federal poverty level for a family of three in the first 10 years of repayment. Under the SAVE plan, Borrower B has a $0 monthly payment for the duration of their repayment period and the entire $5,000 balance is discharged after 10 years.

Borrower B’s AGI remains below this threshold for every year in our model. Under a version of the SAVE plan that does not provide for balance discharge after a certain number of payments, Borrower B would remain in repayment until the end of their life.

The cost of more affordable monthly payments without loan discharge: a lifetime in repayment.

Borrower BSAVE Plan (Original Implementation)SAVE Plan Without Balance Discharge
Original Balance$5,000 $5,000
Balance After 10 Years$5,000 $5,000
Balance After 25 Years$5,000
Balance After 50 Years$5,000
Total Amount Paid$0 $0
Years in Repayment (Including $0 Payments)10> 100 years

i Federal Student Loan Portfolio by Repayment Plan, 2024 Q2, https://studentaid.gov/sites/default/files/fsawg/datacenter/library/DLPortfoliobyRepaymentPlan.xls.

ii The formula that determines a borrower’s monthly income-driven payment has changed across plans, but has never exceeded 20% of a borrower’s adjusted gross income (AGI). Older IDR plans, while still typically more affordable than a standard payment, often resulted in payments that were still too high for many borrowers, in part because the payment calculations do not account for other aspects of family finances. This meant that borrowers with limited resources had to choose between covering their basic needs and making student loan payments. Unsurprisingly, many such borrowers faced delinquency or default, even while enrolled in an IDR plan.

iii This can sometimes be listed as four plan options, depending on whether one counts Original IBR and New IBR as two separate plans.

iv The effects of IDR design changes are challenging to model. A borrower’s experience with repayment in an IDR plan—how much they pay per month, whether their balance is in negative amortization, and how long they remain in repayment—is determined by the intersection of a complex formula with a borrower’s personal (family size) and financial (income) trajectories over time.

To forecast total payments, total subsidies, monthly payment ranges, interest charged, and amount of debt forgiven across variations in IDR plan design, we crafted borrower examples based on assumptions about the following: amount of debt owed; interest rate; loan type (subsidized vs. unsubsidized, graduate vs. undergraduate); initial income when repayment begins; income growth over repayment period; employment status (e.g., years employed, part- vs. full-time); and family size over repayment period.

We assume a 2.4% discount rate for Net Present Value (NPV) calculations based on CPI-U projections from the Bureau of Labor Statistics. Calculations that involve federal poverty levels are based on Department of Health and Human Services Poverty Guidelines for 2024. Incomes included in borrower profile examples are AGIs reported in current U.S. dollars. All loan repayment amounts are calculated by TICAS and are rounded to the nearest $1.