The Best Student Loan Repayment Program Needs an Elevator Pitch

The Obama administration is currently pushing through regulations to expand one of its signature initiatives in higher education policy: a program where students pay back their student loans as an affordable percentage of their income, with their remaining debt forgiven after twenty years of payments. To many, this program (Income-Based Repayment or “Pay As You Earn”) is seen as a way to alleviate defaults and non-repayment for borrowers struggling to pay. But there’s a problem: the terms are so complicated that many borrowers neither understand it nor find it an attractive option.

A lot of the confusion is due to the fact that, because some or all of a borrower’s income is exempt, the “affordable percentage” that a borrower pays actually ranges from zero to ten percent of their income. Not exactly elevator pitch material. More specifically, borrowers pay 10 percent of any income they make above $17,505. Each additional family member (spouse and children) adds another $6,090 to the size of the exemption. That’s a great deal for low-income borrowers, if only they realized it.

The current pitch is true, but misses the point

When the Obama administration pitches Income-Based Repayment (IBR), it says you will “never have to pay more than ten percent of your income.” That’s absolutely true, but completely misses the point. To many borrowers, ten percent sounds high and, in reality, the amount paid is much smaller thanks to the exemption. Here’s a table to show the percentage that people pay at a given income level.

Adjusted Gross Income (Household size of 1)IBR Monthly PaymentPercentage of Income$15,000$00%$20,000$211.3%$25,000$623.0%$30,000$1044.2%$35,000$1465%$40,000$1875.6%That’s a much better deal for low-income borrowers than the advertised 10 percent. And what makes it even more appealing to policymakers is that it’s progressive. The more you make, the more you pay back as a percentage of your income.

Few borrowers fully understand how beneficial IBR can be

This is all a result of the exemption. But because the benefits are opaque and hidden in a formula, few borrowers fully understand how beneficial IBR can be. Despite its theoretical benefits, the exemption makes the system too hard to understand, and IBR looks unnecessarily unattractive.

Instead of an exemption, the government should simply charge a lower percentage on every dollar. This would allow IBR to be priced closer to four or five percent, instead of ten, making the plan much easier to understand and more appealing.

Still, at very low incomes, student loans are rarely if ever “affordable”, because every dollar is needed to pay basic expenses. Without the exemption we still need a way to protect those low-income borrowers. Anyone earning below a certain threshold would owe nothing, and anyone making above it owes a fixed percentage--say, 5 percent--on all of their income. If the threshold were set at $20,000, then a borrower making $19,000 would owe nothing. A borrower making $21,000 would owe $88 per month (significantly less than the average monthly payment of $312 that the average bachelor’s degree recipient pays right now).

To be sure, that’s a big jump in payment from a small raise. But it’s still a relatively low payment, and has the distinct advantage of being less confusing than the current IBR plan and still much lower than the standard monthly payment many borrowers face upon graduation.

The progressive nature of the exemption would be more compelling if people could actually understand it. Thresholds still protect low-income borrowers, while making IBR easier to understand and much more attractive. While it’s hard for policy wonks to say goodbye to a well-targeted progressive formula, the upside benefit is a system people will actually understand and want to participate in.