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NEW REPORT: Income-Based Student Loan Repayment a Windfall for High-Income Borrowers

Paper Recommends Changes Before New Plan Goes Into Effect
Published:   October 16, 2012

Washington, D.C. - Changes to the federal government's Income-Based Repayment (IBR) program — aimed at helping struggling borrowers make their student loan payments — will actually provide generous benefits to upper-income borrowers and graduate students, according to a new report from the New America Foundation's Federal Education Budget Project released today.

The U.S. Department of Education plans to finalize changes to IBR - lowering student loan payments from 15 to 10 percent of a borrower's discretionary income and accelerating loan forgiveness from 25 years to 20 years - by the end of the year. The report, "Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans," provides unique insight into the intricacies of the upcoming IBR changes and their unintended consequences.

The authors developed a calculator to analyze how the changes to IBR will affect different types of borrowers and found they will provide a very small increase in benefits for the lowest-income borrowers or those with federal loans from undergraduate studies. Additionally, the report found the changes will cause certain borrowers to pay more in the long run.

Meanwhile, borrowers with higher federal loan balances - those with graduate or professional degrees — stand to reap significant benefits from the new program. A borrower with an MBA or a law degree can easily have a six-figure loan balance forgiven, even if his or her income exceeds $100,000 for much of the repayment term. It will also provide incentives for graduate and professional schools to increase tuition.

"Until now, little information existed about how these changes to the IBR program will affect different types of borrowers over their entire repayment periods," said Jason Delisle, director of the New America Foundation's Federal Education Budget Project and co-author of the report. "Policymakers seem to have adopted this policy without a long-term view of who will benefit from it."

The report recommends changes that policymakers should make before the new IBR program takes effect to better target its benefits to borrowers with lower incomes rather than high-income borrowers with graduate and professional degrees.

To read the full report, please click here. To try the FEBP calculator, click here.

To watch one of the authors of the report explain the IBR changes, click here.

To interview one of our experts, please contact Clara Hogan.