Much of the policy debate emerging from concerns over student debt has focused on the structure and operation of income-driven repayment (IDR). As the number of available IDR plans and the share of borrowers enrolling in these plans have increased, the system has become more confusing and difficult to navigate. The current problems with the IDR system are not an indictment of the basic approach but are signs of problematic design details and implementation failures. A student loan repayment system that bases required payments on borrowers’ current circumstances can significantly mitigate the difficulties associated with unaffordable education debt. Reform should focus on equity across borrowers and between borrowers and taxpayers.

Even a perfectly structured IDR program would not solve the problems many borrowers face without changes to enrollment and servicing. In this report, recommended changes include the following:

• Creating one income-driven federal student loan repayment plan into which borrowers are automatically enrolled, with clear options for making larger payments to cover interest payments or to pay off the debt more quickly. Using automatic Internal Revenue Service income verification would ensure the system keeps income information up to date with minimal effort on the part of borrowers.
• Raising the income threshold at which borrowers must make payments to 200 percent of the federal poverty level. This would help low-income borrowers more than lowering the assessment rate, which is the share of income a borrower must pay.
• Forgiving remaining balances for borrowers whose incomes do not support retirement of their debts. The system should forgive the remaining balances of borrowers with small debts more quickly and should require those with larger debts to pay longer before having their balances forgiven.
• Diminishing the extent to which borrowers see their balances grow because of interest charges. Possible approaches include government coverage of a set amount of interest that exceeds required payments each month or using a graduated interest rate that would charge 0 percent on the first $10,000 of debt and higher rates on additional debt.

Despite its high average rate of return, higher education does not pay off well for everyone, which makes insurance against poor outcomes a critical component of a system offering meaningful educational opportunities. Limiting the amount of debt—particularly graduate school debt—borrowers can enroll in IDR would facilitate many of the reforms that will strengthen the federal loan repayment system, helping policymakers target subsidies to borrowers who need them most.