Income-based repayment, which provides students with more flexibility in handling student debt, is becoming an increasingly popular option for repaying student loans, decreasing the emphasis on timeliness and provides greater opportunity to work in nonprofit or other service fields upon graduation.
Under income-based debt repayments, loans are paid back in increments based on the level of a person’s income. Through an executive order issued June 9, President Barack Obama made such repayments the cornerstone of student loan reform, allowing all federal loan borrowers to cap their monthly payments at 10 percent of their discretionary income. Additionally, loans are forgiven after 20 years, and those working in the public sector are able to have the debts cleared after just 10 years.
Young Invincibles, a D.C. based organization geared at promoting the interests of 18 to 34 year olds, contributed to a detailed report on income-based repayment in partnership with the Gates Foundation. In their conclusion, the organization advocated for the federal government to make income-based repayment the default system for student loans.
Young Invincibles Press Secretary Colin Seeberger explained that this system of debt repayment provides students with more options after they graduate.
“Income-based repayment options simply give additional flexibility to student borrowers by allowing them to repay less in the early years of their careers and more as they ascend the career ladder and their salaries increase,” Seeberger wrote in an email.
Anthony Carnevale, director and research professor of the McCourt School of Public Policy’s Center on Education and the Workforce, echoed Seeberger’s emphasis on diversifying a graduate’s employment options.
“It’s really matter of giving students choices. By and large, income-based repayment allows people to make choices in their careers that aren’t necessarily tied to their need to pay back their loan,” Carnevale said.
Carnevale added that income-based repayment allows graduates to enter nonprofit work or focus on service without having to worry as much about the status of their loans. This aligns with Georgetown’s commitment to encouraging students in service.
“This idea is consistent with Georgetown’s emphasis on service. It says that service gets special treatment, which it already does, but it would make it more so,” Carnevale said. “If you do not-for-profit work teaching, become a doctor, go to rural Idaho, we’re going to forgive your loans.”
Opposition to the rise of income-based debt repayment derives from the fact that the federal government may incur losses by forgiving student debt. It is currently estimated that the government is poised to make $108 billion from interest payments on student loans over the next 10 years.
However, Carnevale said the possible changes will not come with government expenditure, but rather, with how the government will predict future profits.
“Mostly, the objections to this I find pretty thin. I think generally people think income based repayment is an option that students should have. The big question then is should it be the default? Should it be where everybody starts?” Carnevale said.
He added that he believes most politicians would agree in favor of income-based repayment, but that government dysfunction could be to blame for the lack of progress on this front.
“In a Democratic Congress, I suspect it would move. In a Republican Congress, less likely, but not totally unlikely, because it’s just one way to help people pay off college and to make sure the college education they got has labor market value, which most politicians would agree is a priority,” Carnevale said. “There is some sophistication — not a whole lot — required to legislate on a question like this, and that sophistication is just not there in our political system anymore.”
Although income-based repayment is not the default system, the number of people switching to income-based debt repayment plans has increased considerably in recent years. According to Carnevale, roughly 12 percent of people holding loans today are on an income-based repayment plan, compared with the 3 to 4 percent around five years ago.
Seeberger said it is increasingly popular, especially for college students, to pursue income-based repayment for their loans as awareness of the option grows.
“Pegging student loan repayment to income is gaining popularity as more borrowers learn about the option. Many borrowers have told us that enrolling in an income-based plan has allowed them to pursue their career interests and avoid moving back in with a parent,” Seeberger wrote. “We’ve also seen advocates and the administration dedicate more attention and resources to getting the word out about these plans.”
Despite the potential for income-based repayment to alleviate some issues of student debt — with The Upshot, the data-driven blog for The New York Times, recently hailing the payment plan as a possible solution to the student loan crisis — Seeberger and Carnevale agreed that the high cost of education remains the largest problem for universities.
“Ultimately we would like to see the government make the possibility of graduating from college without a mountain of debt a reality again,” Seeberger wrote. “We have to move beyond debt management and get to the root of the problem — the soaring cost of college and inadequate support for students.”
Carnevale said that as it becomes easier to pay back debt, universities could simultaneously increase their tuitions.
“The more money we put into higher ed, the higher the prices go. If we give higher ed $400 billion, they’ll spend $410. If we give them $410, they’ll spend $420,” Carnevale said. “This does not constrain cost. This just constrains debt, which just allows cost to go up.”
Though income-based repayment helps students with debt, Carnevale said it does not fully address the problem.
“I think in the end, it is part of the package in the higher education reform, but it’s not the whole package because it doesn’t do anything to restrain costs. Arguably, it increases costs,” Carnevale said.