The voices of Urban Institute's researchers and staff
October 9, 2018

Which borrowers should be exempt from making payments on student loans?

October 4, 2018

The “Demographics of Student Loan Borrowers” chart has been corrected to reflect that the “borrower is black” share for 150-250 percent of poverty level should be 25 percent, not 35 percent (corrected 10/9/18).

Republican and Democratic lawmakers agree that federal student loan borrowers should have access to an income-based repayment plan when the borrower does not earn enough to make full payments on her student loan. But policymakers are divided on how much borrowers should pay, and for how long, based on their income.

Income-driven repayment (IDR) allows borrowers to pay back their loans based on their income, and enrolled borrowers with very low incomes (less than 150 percent of the federal poverty level, or FPL) may not have to make payments at all. The House Republicans’ proposal for reauthorizing the Higher Education Act (HEA), known as the PROSPER Act, describes an IDR plan with no exemption for borrowers with low incomes—those earning less than 150 percent of the FPL must still pay $25 monthly (or $5 with documentation of financial hardship). The House Democrats’ HEA proposal, Aim Higher, expands eligibility for $0 payments under IDR, from 150 to 250 percent of the FPL. Although neither proposal is likely to be passed in its current form, these proposals provide a look into how both parties consider student debt affordability.

Defining affordability and ability to pay

The issue of exemption from student loan payment aims to define when a borrower has reached an income that is sufficient for paying down her student loan. PROSPER appears to frame this question as one of personal responsibility, where taking on a student loan is a commitment to make payments even when the borrower earns less than $18,210 (for a single-person household). With Aim Higher, Democrats push for an expansion of the payment exemption, relieving a single borrower of monthly payments until her income reaches at least $30,350.

The Aim Higher bill sets the individual ability to pay at a rate closer to the levels used by IDR plans in Australia and the United Kingdom. In 2018–19, Australian borrowers owe nothing when they make less than AU$51,957 (roughly US$35,300, converting with 2017 purchasing power parity). In the British system, the exemption is £18,330 or £25,000 (US$23,700 and 35,050, respectively).

Although the Aim Higher bill roughly matches international exemption levels for a single borrower, the bill is more generous than international plans for nonsingle borrowers because the FPL exemption is tied to the size of the borrower’s household. A four-person household in the US has an exemption of $62,750, but a borrower in a four-person household in Australia or Britain would receive no increase in her exemption.

Who benefits from expanded eligibility?

We use data from the 2016 Survey of Consumer Finances to understand which student loan borrowers might benefit from expanded eligibility under the Aim Higher Act and which borrowers are already eligible for $0 payments under most current IDR plans but would be subject to making small $25 or $5 payments under PROSPER.

We estimate that about 27 percent of households headed by student loan borrowers are currently eligible for $0 payment because of having income below 150 percent of the FPL. Under PROSPER, the borrowers would have to make payments of at least $25 or $5. But under Aim Higher, an additional 19 percent of households would be eligible for exemption from payments, as the threshold for $0 payments increases to 250 percent of the FPL. Thus, we estimate that 46 percent of households with federal loan debt would make no payments under the Aim Higher plan.

Demographics of Student Loan Borrowers

These two groups of households—those headed by borrowers making less than 150 percent of the FPL and those making between 150 and 250 percent of the FPL—have different characteristics. Nearly 50 percent of those who are currently income eligible for the payment exemption report that they participate in a social welfare program such as the Supplemental Nutrition Assistance Program (SNAP) or Temporary Assistance for Needy Families (TANF). In contrast, just 19 percent of those between 150 and 250 percent of the FPL participate in these programs. Further, those who are currently eligible are less likely to have completed a bachelor’s degree or higher and are more likely to be black relative to those who would be newly eligible under the Aim Higher plan.

demographics of student loan borrowers

On average, borrowers who are currently eligible for income-based repayment borrowed about $5,000 less than those who would become eligible. As would be expected, the average household income between these two eligibility groups is substantially different. Households that are currently eligible had an average income of about $13,000 in 2016, and new Aim Higher–eligible households had an average income of about $40,000.

The difficulty of costing out formula changes

Increasing the proportion of borrowers eligible for $0 payments (and lowering the payment burden for most other borrowers on income-driven repayment) would necessarily increase the cost of the program. But costs can increase in other ways. As the plan grows more generous, more borrowers may opt into these plans. An analysis of current IDR plans by the US Department of Education’s Office of Inspector General found that participation in newer, more generous IDR plans has increased, thereby increasing subsidy costs for these plans.

It is difficult to estimate the full effect of either the PROSPER or Aim Higher IDR changes. But by expanding income eligibility for $0 payments to higher levels than current national and international plans, the Aim Higher proposal could attract more borrowers to take up IDR. To design your own income-driven repayment plan or look at the breakdown of payments by income under current and proposed plans, visit our interactive feature, Charting Student Loan Repayment.

Photo by Anna Jurkovska/Shutterstock

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