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Feature Who Should Pay?
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Designing a More Equitable Income-Driven Repayment Plan
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For the 43 million Americans with student loan debt, income-driven repayment (IDR) plans can offer a more affordable option for paying off loan balances. A third of all borrowers, holding nearly half of all federal student debt, are already enrolled in a federal IDR plan.

IDR plans set monthly payment levels at rates that borrowers can afford based on their incomes. The federal government has changed or added new IDR plans over the past three decades to create more generous repayment terms, but some borrowers still face high monthly payments and ever-growing loan balances. And the amount of debt predicted to be forgiven at taxpayers’ expense continues to rise.

This raises some questions: How can policymakers tweak or redesign the current IDR offerings to create a fair and sustainable loan system? How can policymakers lower payments for the borrowers most in need while ensuring the system’s long-term viability? The Biden administration has outlined a new IDR plan, and policymakers have proposed other changes to the current offerings to create more affordable payments.

These five charts illustrate how policymakers can change IDR plan designs to create more affordable payments, more equitable repayment timelines, and more manageable debt balances, all while ensuring the system’s continued viability. For our charts, we show the effects of each policy change on six different borrowers.

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Jason
Debt: $10,000
Income: $20,000
Eleanor
Debt: $10,000
Income: $40,000
Michael
Debt: $30,000
Income: $30,000
Janet
Debt: $30,000
Income: $50,000
Chidi
Debt: $100,000
Income: $30,000
Tahani
Debt: $100,000
Income: $80,000
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Lessons for creating a more equitable, sustainable income-driven repayment system

For the past three decades, IDR plans have been reformed piece by piece. Different administrations have tweaked assessment rates, exemption levels, forgiveness timelines, and interest treatments to lower monthly payments for borrowers. But successful system reform should not only involve lowering payments for some borrowers but fairly distributing subsidies and mitigating growing balances.

From our analysis, we recommend that policymakers interested in creating a more fair and sustainable IDR system consider the following four policies:

  • Set the exemption level at 200 percent of the federal poverty level based on household size.
  • Use a hybrid assessment rate that sets an additional threshold under which a borrower’s income is assessed at 5 percent and above which it is assessed at 10 percent.
  • Allow borrowers with small debt amounts to reach forgiveness more quickly than they do now—and more quickly than those who take on more debt.
  • Charge no or low interest on the first dollars of debt and forgive up to a fixed amount of unpaid interest each month to slow the growth of debt balances.

By creating a fairer and more efficient IDR system, policymakers can ensure that the highest-earning borrowers do not receive the largest government subsidies, that the lowest-earning borrowers can meet their monthly payments, and that the system can continue sustainably.

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About the Data

The data in this tool are the researchers’ calculations. To model income-driven repayment outcomes, we assume 2 percent annual inflation of the federal poverty level, 4 percent annual earnings growth, 4.5 percent interest on loans unless otherwise specified, and each borrower represents a single-person household. Estimates are based on borrowers making all payments on time with no early or additional payments. For present-dollar values, we use a 2 percent discount rate.

These calculations do not capitalize accrued unpaid interest at any point in repayment, which deviates slightly from the capitalization rules under current IDR, but this decision has a negligible impact on the results. See our full report for more information about our methodology. To adjust some of these IDR parameters, see this tool.

PROJECT CREDITS

This feature was supported by Arnold Ventures. We are grateful to them and to all our funders, who make it possible for Urban to advance its mission. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Funders do not determine research findings or the insights and recommendations of our experts.

RESEARCH Sandy Baum, Jason Delisle, Jason Cohn

DESIGN Christina Baird

DEVELOPMENT Fernando Becerra (fernandobecerra.com)

EDITING David Hinson

WRITING Wesley Jenkins

Research Areas Education Wealth and financial well-being
Tags Economic well-being Higher education Paying for college
Policy Centers Center on Education Data and Policy