Student loan repayment is confusing. Between the multiple options available to borrowers and the bureaucratic difficulties involved in enrolling in and maintaining eligibility for income-driven repayment plans, borrowers nationwide are often unsure of their repayment obligations. Now with conflicting federal court decisions, the repayment system has become even more opaque.

The current controversy revolves around the Biden administration’s efforts to modify provisions within its Saving on a Valuable Education (SAVE) plan, which seeks to reduce the amount undergraduate borrowers must repay. Pending further court decisions, the SAVE plan would increase the income threshold above which borrowers begin to make payments and decrease payment amounts from 10 percent of income above the threshold to 5 percent.

Disagreement about these changes is not surprising. Though the plan would help borrowers struggling with repayment, some are concerned about it transferring responsibility for students’ debts to taxpayers by lowering payments and dramatically increasing the share of borrowers who never fully pay off their debts.

Strong views on all sides of the issue are easy to find, but if policymakers’ goal is to make a more equitable and efficient system, the provision in the SAVE plan that provides earlier loan forgiveness for borrowers with small debts—which accounts for about 3 percent (PDF) of the program’s total cost—is a vital improvement to the program’s equity. Policymakers should make every effort to keep it.

Court decisions are not differentiating between subsidy increases and program equity

Repayment plans that base monthly payments on a borrower’s income have been available since the mid-1990s and a significant component of the system since 2009. About one-third of borrowers are currently enrolled in one of the multiple income-driven repayment plans, collectively owing half of outstanding federal student debt dollars.

As the debate about how to reform loan repayment continues, neither the courts, journalists, nor many advocates are asking how to make loan repayment more equitable and more efficient. An appellate court reversed the Kansas court’s stay on lowering payments on undergraduate loans from 10 percent to 5 percent of discretionary income, but the Missouri court’s rejection of shorter times to debt forgiveness for borrowers with smaller debts still stands. This decision ignores the reality that asking borrowers with similar incomes to repay similar amounts, regardless of the amount they borrowed, is deeply inequitable.

Imagine two borrowers. The first borrows $10,000, attends college for one year, then leaves school and enters the workforce. The other stays in school and borrows the maximum allowed for independent undergraduates under the federal student loan program—$57,500. Out of school, both borrowers earn $45,000 per year and are expected to pay $46 per month. With the current interest rate of 6.53 percent, neither borrower will cover all the interest charged, so their balances will remain at the level originally borrowed, given the SAVE plan’s provision that prevents unpaid interest from accruing.

Assuming the two borrowers’ incomes do not diverge, they will end up making the same payments for 20 years before having their debts forgiven despite borrower two having taken out a loan more than five times the size of borrower one’s loan. No other loan program decouples the amount of repayment required from the amount borrowed in this way.

If we accept that borrowers cannot reasonably make monthly payments they cannot afford, the most equitable solution is the SAVE plan’s approach of making the number of payments required before remaining balances are forgiven increase with the amount borrowed.

Linking years until loan forgiveness to amount borrowed would create a more equitable system

As originally proposed, the SAVE program would reduce the time to forgiveness from 20 years to 10 years for those who borrowed $12,000 or less. For borrowers who took out more than $12,000, the repayment period would increase by one year for each additional $1,000 borrowed, up to 20 years. If a student borrowed $15,000, she would repay for up to 13 years, and if she borrowed $21,000, she would repay for up to 19 years. The 20-year repayment period would continue to apply to those with larger debts. This strategy links the amount repaid to the amount borrowed, without requiring monthly payments that generate undue hardship.

Although we can debate the best minimum and maximum repayment periods, requiring the same payments from students who borrow different amounts provides an obvious incentive to borrow as much as possible, in addition to distributing inequitable subsidies.

Whether or not the courts uphold the Biden administration’s efforts to increase the subsidies embedded in the student loan repayment system, the SAVE plan’s provisions to increase repayment equity should be preserved. If policymakers are committed to upholding equity in student loan repayment, they should clearly differentiate between the level of embedded subsidies and the equity of the repayment structure. Linking the amount of time borrowers spend in repayment to the amount they borrowed is critical for an equitable, efficient repayment system.