2019

Income-driven repayment (IDR) plans set monthly student loan payments based on income and family size, allowing borrowers to pay more when their income is higher. Yet, the current array of such plans available today - for which eligibility requirements, costs, and benefits vary - creates barriers to successfully navigating student loan repayment. The variety of available plans can also contribute to under-enrollment in IDR plans by the borrowers who need it the most.

There is broad and bipartisan recognition of the need to simplify and improve IDR, and multiple policymakers have put forth specific proposals to reform and streamline IDR. TICAS has also developed a detailed proposal for a streamlined IDR plan, which including specific examples of the relative cost to borrowers of different IDR design decisions.  

The details of IDR design directly impact policymakers’ ability to simplify student loan repayment while avoiding unintended consequences that increase the cost of student debt, particularly for the lowest income borrowers. The ability of IDR to fulfill its promise as a safety net for borrowers and the degree to which benefits flow to borrowers in the most need of relief depend on specific design decisions. These decisions include fundamentals like how monthly payments are calculated and how long borrowers remain in repayment before the balance of the loan is forgiven. And even more technical design elements, like the treatment of interest, affect the cost of debt repaid in IDR plans.

Several major legislative proposals to establish a streamlined IDR plan have been introduced in the former and current Congress. These include Senator Merkley’s (D-OR) Affordable Loans for Any Student Act (S. 1002, 116th Congress)[1] (a proposal also incorporated in Representative Scott’s comprehensive proposal to reauthorize the Higher Education Act, the Aim Higher Act (H.R. 6543, 115th Congress)); Senators King (I-ME) and Burr’s (R-NC) Repay Act (S. 1176, 115th Congress); Senators Warner (D-VA) and Rubio’s (R-FL) Dynamic Repayment Act (S. 799, 115th Congress); and Representative Zeldin’s (R-NY) ExCEL Act (H.R. 2580, 115th Congress).[2] Representative Foxx’s comprehensive proposal to reauthorize the Higher Education Act (the PROSPER Act, H.R. 4508, 115th Congress) included a reformed single IDR plan, and a single IDR proposal was also included in the last three President’s budgets.[3]

We reviewed the details of the IDR repayment plan in all of these major proposals, [4] as well as the most recently created IDR plan, REPAYE, to identify their approach to key design details and shed light on areas of policy agreement beyond broadly reducing the number of available repayment plan options. The summary table below (click for full size) demonstrates key areas of consensus as well as divergence.

Our analysis of the design details of key proposals identified a number of encouraging areas of full or near consensus, including that:

  • IDR is provided as an option to borrowers rather than mandated or universal;
  • IDR provides debt forgiveness after some fixed period of repayment;
  • IDR is available to student borrowers with federal loans regardless of their debt-to-income ratio;
  • IDR benefits are better targeted to those who need them most:
    • All borrowers in IDR always make payments based on their income;
    • Married borrowers are treated consistently, regardless of how they file their taxes; and
  • Borrowers enrolled in IDR have the option for automatic annual income certification to stay enrolled.

The proposals we reviewed also diverge on a number of key design details that directly impact the cost of student loan repayment, including:

  • The share of income a borrower must put toward monthly loan payments;
  • The number of years a borrower must be in repayment before any remaining debt is forgiven;
  • The treatment of accumulated interest growth;
  • Circumstances under which interest capitalizes during enrollment; and
  • The tax treatment of debt forgiven in IDR.

As Congress continues working towards a comprehensive reauthorization of the Higher Education Act, we’ll be exploring in more detail these key design decisions and releasing a fuller analysis of areas of consensus and divergence.


[1] The Affordable Loans for Any Student Act was also introduced in the House by Representative DeLauro (H.R. 2065, 116th Congress).

[2] The ExCEL Act was introduced prior by Representatives Polis and Hanna (H.R. 2580, 115th Congress).

[3] Several key design details of the President’s proposal are not publically available.

[4] We focus specifically on the design of a proposed income-driven repayment plan. Some of these bills also make other changes to the loan program, including the creation of a new single loan program, inclusive of different interest calculations and changed loan limits, as well as the availability of other benefits like PSLF.

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As Congress works toward a comprehensive reauthorization of the Higher Education Act, policymakers share a goal of finding ways to simplify federal student loans so that students can more easily understand and navigate borrowing and repayment. Multiple budget proposals from  the current Administration and from House Republicans have called for simplifying the loan program by eliminating subsidized student loans, which offer students better terms, including no accrual of interest during school and for six months after graduation. Eliminating these loans leaves students who need to borrow with no option but to use unsubsidized loans, which begin accruing interest at the time they’re borrowed. While one single federal loan may be simpler, this kind of simplicity would come at the expense of college affordability and leave student loan borrowers with bigger bills for little to no gain because the savings generated from these proposals are not reinvested in students.

In fact, eliminating subsidized loans would increase the cost of college by thousands of dollars for many of the nearly six million undergraduates who receive those loans each year.* The Congressional Budget Office (CBO) recently estimated that eliminating subsidized loans would add $21.6 billion in costs to students over 10 years.

Subsidized student loans are allocated on a sliding scale based on a borrower’s financial need and carry important advantages: not only does interest not accrue while students are in school and for six months after they leave school, but there is also no interest accrued during active-duty military service and for up to three years of unemployment or other economic hardship.

The charts below illustrate how much more a student would have to pay if subsidized loans are eliminated and the student borrows the same amount in unsubsidized loans instead. The calculations assume the student starts school in 2019-20, borrows the maximum subsidized student loan amount ($23,000), and graduates in five years.

The most recent estimates (based on CBO’s January 2019 projections of 10-year T-note yields) show that eliminating subsidized loans would cause this student to enter repayment with $3,900 in additional debt due to accrued interest charges while she was enrolled in school. As a result, the total cost of her debt would increase by 17 percent: if she repaid her debt over 10 years, her total costs would increase by $5,100. If she repaid over 25 years, the total cost would increase by $7,300.

 

 

The added costs to students would be even higher if interest rates increase faster than current projections. If the undergraduate Stafford loan interest rate hits the statutory cap of 8.25%, eliminating subsidized loans would cause this student to enter repayment with $5,700 in additional debt due to accrued interest charges. As a result, she would end up paying 25 percent more over the life of her loan: if she repaid over 10 years, she would incur $8,350 in additional costs and $13,450 in added costs if she repaid over 25 years.

 

 

As Congress considers ways to simplify student loans, it must take care to not increase the cost of college for borrowers currently benefiting from subsidized federal loans. In a time of growing public concern about rising student debt and broad consensus on the importance of higher education and postsecondary training to the US economy, we need to be doing more, not less, to keep college within reach for all students. For more information on TICAS’ proposals to streamline and improve federal student loans, see our summary of recommendations and our report, Make it Simple, Keep it Fair: A Proposal to Streamline and Improve Income-Driven Repayment of Federal Student Loans.

Note: The borrower in this example would only be eligible for a 25-year repayment plan if she borrowed unsubsidized Stafford loans in addition to subsidized Stafford loans and entered repayment with more than $30,000 in debt. The most recent data show that almost four in five (79%) undergraduates with subsidized loans also have unsubsidized loans.

*This figure refers to the 2016-17 award year. The most recent data file from the Department of Education notes these data are not final, and are current as of October 2018. The file also includes information for subsequent award years, but we have found that student loan volume data tend to get substantially revised after the first and second releases.

 

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Only two weeks into 2019, and already Capitol insiders are buzzing about new higher education laws, presidential hopefuls are heading to Iowa, and governors across the country are rolling out new ideas. To make sense of it all, I polished my Magic Eight Ball to hazard four predictions about the next 12 months.

1. Congress will advance higher education legislation.

Congressional efforts to rewrite the Higher Education Act are gaining steam. Sen. Lamar Alexander, who leads the Senate education committee, announced his retirement, leaving higher education as his only major piece of unfinished business. Newly re-elected House Speaker Nancy Pelosi noted the effort in her recent statement on higher education. Think tanks are polishing their position papers, and congressional staffers are drawing up lists of policy options.

Sen. Alexander and his Democratic partner, Sen. Patty Murray, are effective legislators with a track record of working together. Most recently, they produced a bipartisan bill on one of the most controversial questions in Washington: how to stabilize the Affordable Care Act. Now, with Rep. Bobby Scott taking the helm of the House Education and Labor Committee, we have the best chance yet at a new higher education law.

2. States will invest more in college affordability.

With improving revenues, states are in a better position to spend more on need-based aid and keeping tuition low. A growing national conversation about free college has put pressure on policymakers to introduce bold affordability ideas, and a spate of newly elected Democratic governors takes office this month eager to make a splash.

In his first days in office, California Governor Gavin Newsom proposed substantial investments in Cal Grants, keeping tuition low at community colleges and public universities, and steps to help more students graduate. Even better, Newsom described these steps as a "down payment" on greater resources to come.

Look for more states to join California in investing in college affordability in the coming months. The investment is sorely needed: State spending on higher education is lower than it was 10 years ago, adjusted for inflation and enrollment growth.

3. Student debt for graduates will grow slowly, though millions will continue to struggle

Last September, in their annual report on student debt, TICAS researchers Diane Cheng and Veronica Gonzalez found that average debt of graduating seniors is growing more slowly than in years past. After growing by about 6 percent per year between 2008 and 2012, it grew by less than 0.5 percent between 2012 and 2016. I expect the slower growth will continue into 2019.

We don't know for sure why student debt is slowing down, but there are likely several factors. Greater state spending and scholarships may have helped make a dent. Increased media focus on college costs may have made students more careful consumers.

While slower growth in student loans is welcome news, costs remain high and many borrowers continue to struggle. More than 1 million students default each year, and low-income students and students of color are particularly likely to struggle to get out from under their college debt.

4. The bloom will come off income-share agreements.

Income-share agreements have entered the higher education hype cycle. The idea is to replace traditional loans and allow students to repay their tuition as a share of their future earnings. The hype reached its highest point last week when New York Times columnist Andrew Ross Sorkin described them as "a fundamental shift that could finally lift the crippling debt load we routinely push onto students."

Of course, because students are obligated to make future payments, income-share agreements are merely a different form of debt. For almost all students, federal student loans offer lower rates and a similar option to repay as a share of income. Income-share agreements may make sense for some students, but they are niche products that complement federal loans, not a solution to college affordability.

Not that long ago, policymakers often left higher education on the back burner. No longer. More and more Americans are looking to college as the best bet to join the middle class and enjoy a better life. Student debt is now a kitchen table issue that immediately impacts families' lives, the very reason we may see change in 2019. Time will tell.

 

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After the pomp and pageantry of today’s inauguration, one of new California Governor Gavin Newsom’s first acts will be to release a proposed state budget for 2019-20. News accounts suggest that his first budget will embrace the fact that investing more in education – from preschool through adulthood – must be a priority for California to retain its economic strength and standing. Reclaiming the state’s mantle as a pioneer in affordable, quality higher education will require new investments in need-based financial aid to ensure that the cost of a degree is within reach for all Californians.

Currently, low-income students at the vast majority of public colleges in California would have to work more than 20 hours per week to afford college costs, after accounting for grants and scholarships. This is true even when tuition is free because other costs like living expenses, textbooks, and transportation make up the majority of students’ college costs.

While California has the largest state grant program in the country – the Cal Grant – most eligible grant applicants do not receive grants because too few are available. Many of those who do receive grants have seen their award amounts stagnate, though the 5 percent of community college students who receive Cal Grants can access supplemental programs that make up for some of the lost ground. 

Yet while the extent of the problem is substantial, there is reason to be optimistic. More than ever before, there is agreement about the existence of a problem, how it manifests, and how to solve it.

  • There is a strong consensus in California that college is unaffordable. The majority of Californians – including more than six in ten Democrats and Republicans alike – believe college affordability is a big problem.
  • Experts generally agree that the state’s affordability challenges contribute to equity gaps in who gets to and through college, hold students back from completing degrees, and can leave graduates with burdensome levels of student loan debt to repay. The experts’ near universal recommendation: to provide more support to students who need help paying for nontuition costs of college.
  • Since 2016, there have been several proposals, including two at the request of the Legislature, to reform California’s financial aid. Each of the proposals envisioned a new approach: taking students’ total college costs into account and expecting that students and families would make financial contributions that were reasonable given their own financial circumstances. Federal, college, and state grant aid would cover the rest.
  • While student groups and student-focused advocates have long called for increased investments in Cal Grants, colleges have now joined the charge. The California Community Colleges Board of Governors recently requested an additional $1.5 billion in financial aid support their students, “given evidence that additional financial aid improves the likelihood of retention and completion.” University of California president Janet Napolitano and California State University president Tim White recently said that financial aid reform “can be a cornerstone of further student achievement,” and called upon the state to “expand the reach of Cal Grants” and increase “the availability and size of what is currently known as the Cal Grant B Access Award [which helps students cover nontuition college costs].” And at its last meeting of 2018, the California Student Aid Commission voted to recommend reducing Cal Grant eligibility barriers and to focus more on students’ total college costs than has been done historically.

The level of attention paid to financial aid reform in recent years is unprecedented, as is the level of consensus around where new investments need to be made. Governor Newsom has also demonstrated a keen understanding of these issues, and he committed to ensuring that state financial aid expands to serve more students and to a greater extent. We look forward to working with the governor and Legislature as they chart a new course for California that restores its role as a national leader in quality, affordable higher education. 

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