Student loan debate: Take the focus off interest rates

Income-based repayment is an obscure student loan option that would work well for millions more borrowers than are using it today.

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The student debt crisis is one of those issues that concentrates the minds of both parties in Congress. That's why there are at least half a dozen legislative proposals circulating in Washington to forestall a doubling of interest rates on many federal student loans scheduled to take effect July 1.

But it doesn't explain why almost all those proposals ignore the one remedy to graduates' loan burdens that would make their squabbling over an interest-rate solution mostly irrelevant.

The remedy is income-based repayment. Put simply, that means that a graduate is obligated to commit a given percentage of his or her annual income to pay down the loan, like a tithe. If that sounds radical, it shouldn't, because the option has been available to most borrowers since 2007, and was even enhanced last year.

But it shouldn't be surprising that Congress has ignored income-based repayment, or IBR. Most student borrowers also ignore it, despite its manifest advantages.

"The program is so new, it hasn't made it into the collective consciousness of schools and borrowers," Jason DeLisle, an advocate of IBR at the New America Foundation, told me.

Education authorities estimate that a bit more than 1 million student borrowers use income-based repayment, out of 38 million graduates carrying debt.

"Many more are undoubtedly eligible," says Lauren Asher, an expert on IBR who is president of the Oakland-based Institute for College Access and Success. She notes that 5 million student loan borrowers are behind on their payments. The private servicers who manage loans for the government don't do enough to steer them into IBR, which could lower default rates sharply. "There needs to be a lot more outreach to borrowers in distress," she says.

Income-based repayment isn't a panacea covering all student borrowers. But for many it's a big improvement over the standard 10-year repayment plans that leave them burdened with bigger monthly payments than they can afford, particularly when they're just launching their careers.

The concept started in the 1990s for a limited number of borrowers. Its reach was vastly expanded in 2009, when the option was made available for all direct federal loans, such as Stafford loans. The loans have to be made to the student, not his or her parents.

The IBR program capped loan payments at 15% of the borrower's income, over and above an exemption pegged at 150% of the federal poverty level. For a single graduate earning, say, $30,000, the exemption would be worth $17,235, so the maximum annual repayment would come to 15% of the remainder, or $1,914 — about $160 a month. After payments were made regularly for 25 years, the unpaid balance of the loan would be forgiven.

In 2010, Congress and the White House devised a more generous program known as Pay as You Earn, covering students who took out their first federal loan after Sept. 30, 2007. Starting in December last year, this program lowered the payment cap to 10% of income after the exemption, and moved the forgiveness threshold up to 20 years — 10 years for people with jobs in government or nonprofit organizations.

There are pros and cons to Pay as You Earn. "For undergrads, it's a very generous safety net, because undergrads can't borrow more than $31,000," DeLisle says. "They'd probably pay back that loan within 10 or 20 years."

However, for students in graduate or professional school, who don't face a practical limit on their federal student borrowing, "it's a recipe for disaster," he says.

That's because the program's benefits are magnified for, say, law school or medical school students who may be more affluent than the average student to begin with. The more they load up on debt, the more likely the forgiveness rule will act as a windfall — and the more costly the program becomes for the federal government.

The average debt of a graduating lawyer is already about $75,000 at public law schools and $125,000 at private institutions; for graduating doctors the figures are $119,000 and $150,000. The Department of Education estimates that more than half of all borrowers under Pay as You Earn will eventually receive forgiveness, with an average balance of $41,000.

It's only proper to point out that some factors work against accumulating sky-high debt, even with forgiveness beckoning on the horizon. For one thing, interest accrues on the unpaid balance, so the lower the payment, the more costly the loan in total. For another, the forgiven balance is treated as taxable income for the typical borrower.

All this points to some of IBR's virtues and pitfalls, as well as ideas for making it more effective and more popular. To begin with, it reduces the focus of Congressional debate over student loans — where to set interest rates — to a secondary concern.

"The interest rate fight is a proxy for affordability," DeLisle observes. "IBR fixes that."

But by removing any need for students in business, law and medical schools to seek value for their money, IBR could also contribute to tuition inflation. "We don't want to make schools and students price insensitive and allow fourth-tier law schools to overcharge," says Robert Gordon, a guest scholar on education and fiscal policy at the Brookings Institution.

But the real problem with IBR is that too few students even know about it, and its multiple options and intricate paperwork discourage those who do. IBR advocates say it should be presented to graduating students as the default repayment option, instead of fourth on the list behind standard 10- and 25-year payment plans. The application process needs to be simplified.

The forgiveness option should be refined so it doesn't pose a windfall for well-heeled students or successful professionals. It's so potentially costly and unfair that one Congressman already is taking aim.

Rep. Tom Petri (R-Wis.) has introduced a measure making all loans subject to income-based terms, but also removing the forgiveness benefit. Instead, he would cap the accrued interest at 50% of the principal — all loans would have to be repaid, but once the cap is reached they become the equivalent of zero-interest loans.

Somewhere between Petri's bill and the current program lies the right answer to the student loan mess. Income-based repayment may not be the right choice for everyone, but surely it is for millions more borrowers than are using it today. Forgiveness is valuable as a light at the end of the tunnel for college graduates who have met their obligations during their careers, but as currently set up it doesn't serve those who really need it and represents a giveaway to those who don't.

What's absolutely clear is that Congress has its eye on the wrong ball. Tweaking interest rates "is a short-term argument," Petri says. "It's not going to make loans more affordable."

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at, read past columns at, check out and follow @hiltzikm on Twitter.

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