Income-Based Repayment

Both the President’s FY14 Budget and the Comprehensive Student Loan Protection Act, reintroduced in the Senate this week, propose significant changes to federal student loan interest rates. Rather than being set by Congress, interest rates on new student loans would be tied to the U.S. Treasury’s 10-year borrowing rate that year and remain fixed for the life of the loan, even if interest rates dropped substantially. Though not identical in their details, both proposals would lower the interest rates for students and families who borrow this fall, but allow interest rates to rise steeply for those who borrow in the coming years. Based on CBO projections, interest rates for unsubsidized Stafford loans would exceed 6.8% by 2016 and rise above 8% by 2018.

Moreover, both proposals would eliminate the cap on student loan interest rates, which means that actual rates for all types of federal student loans could rise even higher than currently projected. For the first time ever, there would be no limit to how high rates could go. In addition to increasing the costs of loans and college, uncapped interest rates could deter students from enrolling in or completing college, particularly during periods of high and/or rising interest rates.

Some have suggested that an interest rate cap is not necessary if borrowers have access to an income-driven repayment plan, such as Income-Based Repayment (IBR) or Pay As You Earn (PAYE). In IBR, which is widely available, monthly payments are capped at 15% of discretionary income, and after 25 years of qualifying payments any remaining debt is discharged. In PAYE, currently only available to some current students and recent graduates, monthly payments are capped at 10% of discretionary income, and any remaining debt is discharged after 20 years. New borrowers in 2014 will have access to a similar repayment plan. The President’s budget goes a step further by providing access to existing as well as new borrowers starting in 2014. It also prevents the taxation of debt discharged through income-driven plans.

Although these programs can help keep monthly payments manageable, income-driven repayment plans are no substitute for a cap on interest rates.  First, under current law, not all federal loans or loan borrowers are eligible for an income-driven repayment plan. 

For example, to qualify for IBR or PAYE, borrowers must have a relatively high debt-to-income ratio. Second, even borrowers who qualify for IBR or PAYE can have to pay much more in total with higher-interest-rate loans. In income-driven repayment plans, the interest rate can affect both the monthly payment amount as well as the length of time in repayment. For example, a single borrower who enters repayment with $20,000 in debt and starts out making $30,000 a year (AGI increasing 4% a year) ends up paying much more in PAYE with a higher interest rate than a lower interest rate.

  • An interest rate of 6.8% rather than 3.4% would increase the borrower’s total cost by about $12,000.
  • An interest rate of 8.0% rather than 3.4% would increase the borrower’s total cost by about $19,000.

Comprehensive reform is needed to keep federal loans affordable over time, streamline the program, and better target benefits, but these recent proposals miss those marks. There is a better way forward. TICAS’ recent white paper proposes changes that keep loans affordable, simplify loans, and target benefits to those with more financial need. Our proposal includes both a universal interest rate cap and a guarantee that rates for borrowers in repayment will never be too much higher than the rates being offered to current students. As also detailed in our white paper, the benefits of the improved IBR plan should be targeted so that borrowers with very high incomes do not receive substantial forgiveness when they could well afford to pay more. Read our statement about the President’s FY14 Budget and our white paper on improving federal student aid to increase college access and success. 

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Starting tomorrow (Friday, December 21), recent college graduates with federal student loans can apply to lower their monthly payments using the Pay As You Earn plan. This new repayment plan has a lower monthly payment cap than the more widely available Income-Based Repayment (IBR) plan. Pay As You Earn also provides forgiveness after 20 years of payments, rather than 25 years in IBR.

As with any repayment plan that allows you to pay less per month, it is possible to pay more in the long run under Pay As Your Earn or IBR due to accumulated interest. But for millions of Americans currently struggling to repay their loans, these plans ensure that payments will be manageable, help prevent delinquency and default, and provide a much-needed light at the end of the tunnel.

Countering the effects of recession

Pay As You Earn is designed to help recent students entering the job market for the first time in today’s tough economy. Only those who took out their first federal loan after September 30, 2007 and had at least one disbursement after September 30, 2011 will qualify.

The negative effects of starting your career in a down economy can last more than a decade. According to a recent study from the Economic Policy Institute:

Research shows that entering the labor market in a severe downturn can lead to reduced earnings, greater earnings instability, and more spells of unemployment over the next 10 to 15 years. […] In short, the labor market consequences of graduating in a bad economy are not just large and negative, but also long-lasting.

Earlier this year we found that two-thirds of the Class of 2011 had loans, and their average debt was $26,600 for a four-year degree. Yet half of recent college graduates are either unemployed or underemployed. Compared to students who enter the job market in better economic times, recent and soon-to-be graduates are likely to face lower earnings and higher unemployment for many years to come.

Helping lower income borrowers

Borrowers with modest incomes, who need help the most, will get significant relief from Pay As You Earn. As we noted in a recent post, a student who graduated in 2012 or later with $26,600 in federal loans and earns $25,000 a year (adjusted gross income) would pay one-third less each month in Pay As You Earn than in the current IBR plan. The same is true for a married borrower with the same debt who just completed a bachelor’s degree, has two children, and earns $45,000.

The Department of Education reports that more than 1.3 million borrowers are already enrolled in IBR, and nearly 90% of them have incomes under $50,000.

Applying made easy

A new electronic form at makes it easy to apply online for Pay As You Earn, IBR, and related repayment plans. Borrowers can even ask to be enrolled in whichever income-based plan they qualify for that has the lowest monthly payment.

Together, these plans can help millions of borrowers keep their student loan payments affordable even in tough times.

NOTE:  TICAS and its Project on Student Debt developed the policy proposal that formed the basis of IBR, which recommended forgiveness after 20 years of payments. Dozens of organizations representing students, consumers, colleges, and lenders supported the goals of that proposal. Learn more about IBR and Pay As You Earn at

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Recent and soon-to-be college graduates will soon have a new option to help keep their federal student loan payments manageable and avoid default—the Pay-As-You-Earn repayment plan recently finalized by the U.S. Department of Education.

Students graduating from college this year are entering the job market with record student debt and facing near record unemployment rates. Half of recent college graduates are either unemployed or underemployed—the highest share in more than a decade.  This makes the new student loan changes particularly timely.

Pay-As-You-Earn is designed to help these recent and soon-to-be college graduates, allowing them to make lower income-based monthly payments on their loans than the current Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR) plans allow.  Pay-As-You-Earn will also provide loan forgiveness after 20 years rather than 25 years of payments, allowing borrowers to more easily save for retirement and help their children pay for college.  To be eligible, borrowers must have taken out their first federal student loan after September 30, 2007 and received a loan disbursement after September 30, 2011—meaning primarily recent undergraduates.

Some have questioned how much borrowers with modest incomes will benefit from the plan.  In fact, such borrowers will receive significant relief. Here are just a couple of examples:

  • For students leaving school in 2012 or later with $26,600 in federal loan debt (the average total debt for borrowers in the Class of 2011) and earning $25,000 a year (adjusted gross income), Pay-As-You-Earn will lower their monthly payments by about one-third (from $103 to $69) compared to the current IBR plan.
  • Pay-As-You-Earn will also provide significant repayment relief to the many working adults who went back to college during the economic downturn.  A married recent graduate with two children, an adjusted gross income of $45,000, and $26,600 in federal loans will also see his or her monthly payments reduced by one-third (from $130 to $87) compared to the current IBR plan.

No one repayment plan will be the best or most affordable option for everyone, but particularly in today’s economy, many borrowers are struggling to avoid delinquency and default.  With the Class of 2012’s first student loan payments coming due starting this month, for many, Pay-As-You-Earn cannot come soon enough.

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The New York Times ran the editorial "Help Needed for Student Debtors" yesterday, reviewing the recently-released official two-year cohort default rates for fiscal year 2009. The rates show a sharp uptick in defaults, with 8.8 percent of student loan borrowers who entered repayment in 2009 defaulting by the end of 2010, up from 7 percent for those who entered repayment in 2008.

Following-up on an article that ran earlier in the week, the NYT Editorial Board also promotes the Income-Based Repayment program, that can help struggling borrowers remain in good standing, writing "the government needs to make sure that borrowers at risk of default have access to this program." Read the editorial and article

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As July 1 (the first day the Income-Based Repayment option becomes available for borrowers) draws closer, coverage of IBR and Public Service Loan Forgiveness is ramping up.

The Institute's acting president Lauren Asher was featured in a recent USA Today article focused on IBR. An excerpt:

Starting July 1, borrowers will have a new option: a repayment program that caps monthly payments based on income. It targets borrowers who would have a hard time paying basic living expenses if they had to make standard monthly payments on their loans, says Lauren Asher, acting president for the Project on Student Debt. Under the income-based repayment program, such borrowers will never have to spend more than 15% of their discretionary income — an amount based on federal poverty guidelines — on student loan payments. Most who qualify for the program won't spend more than 10% of their income on student loans. Those whose income falls below 150% of the poverty level (see box) won't be required to make any payments, Asher says.

Read the entire article here

Additional Coverage

For more information about Income-Based Repayment visit

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