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Automatic Income-Based Repayment?

April 15, 2014

WASHINGTON -- There is relatively broad consensus among policy makers and advocates in Washington that income-based repayment is, in most cases, a useful tool for helping borrowers manage their monthly student loan payments.

But should the federal government automatically enroll borrowers in the program as they leave school?

That’s a debate that is increasingly playing out among higher education researchers, advocates and policy makers as Congress moves toward reauthorization of the Higher Education Act.

Senator Tom Harkin, who chairs the Senate education committee, said at a hearing last month that he plans to explore the issue, after two witnesses -- a student aid administrator and an advocate for low-income students -- disagreed about the approach.

Elsewhere, some researchers have called for a single federal income-based repayment program that automatically deducts payments from borrowers’ paychecks, a model that has been used in other countries, such as Australia, New Zealand and the United Kingdom. Representative Tom Petri, a Wisconsin Republican, has introduced legislation to that effect.

And on Monday, several papers funded by the Lumina Foundation and discussed at an event here added to that debate.  

Underlying nearly all of the papers was a consensus that the government’s existing array of income-based repayment programs -- there are seven -- need to be simplified and streamlined to make it easier for borrowers to enroll.

Brent Evans, a professor of higher education and public policy at Vanderbilt University, and his co-authors Angela Boatman, also of Vanderbilt, and Adela Soliz of Harvard University, sought to apply lessons of behavioral economics to the programs.

Evans said that the government should consolidate the programs into one since consumers tend to make suboptimal decisions when they are presented with too many choices.

Lauren Asher, president of the Institute for College Access & Success, which helped develop the framework for the Obama administration’s expansion of income-based repayment, said her group had concluded that automatic enrollment in the programs would not be a good policy. However, she said, TICAS has proposed that the government place all federal borrowers who are six months delinquent on their loans -- three months away from defaulting -- in an income-driven plan.

“Income-driven repayment is not the optimal choice for everyone,” Asher said, noting that borrowers end up paying more in the longer term when their monthly payments are reduced.

Asher also said she was concerned that automatically enrolling borrowers in income-based repayment could remove incentives for states and institutions to keep down college costs, thus “creating a safe haven for schools that are not serving students well.”

TICAS also has concerns about an automatic-payment scheme in which employers act as middlemen in loan repayment, Asher said. Such a system would raise privacy and accountability concerns since a borrower would have to explain his or her repayment situation to an employer, she said.

Several researchers on Monday also questioned whether income-based repayment programs were properly structured as they exist now.

Beth Akers of the Brookings Institution and her colleague, Matthew Chingos, sought to estimate the long-term costs of the programs for borrowers and taxpayers. They found that the cost to taxpayers of allowing borrowers to pay off their loans over the 20- or 25-year periods accounts for about one-quarter to one-third of the programs' cost. The loan forgiveness provisions, meanwhile, account for half of the costs. Under the programs, the government forgives any remaining balance after 20 or 25 years.

The loan forgiveness aspects of income-based repayment, they argue, are not critical to providing a safety net that protects borrowers and, in fact, produce perverse incentives for students to take on more debt.

That is a concern that has been raised before. The Obama administration last month called for some changes to income-based repayment programs. Its fiscal year 2015 budget proposes trimming some of the benefits that accrue to borrowers under the income-driven plans, including caps on the amount of debt that is forgiven and extending the payment period for some borrowers with high debt loads.

The House Republican budget released earlier this month by Representative Paul Ryan of Wisconsin similarly calls for cuts in the benefits for income-based repayment plans.

The Obama administration has sought to better publicize and boost enrollment in the existing federal income-based repayment programs. About 11 percent of all federal borrowers are currently enrolled in such repayment plans.

Education Department officials have streamlined some aspects of the online application for income-based repayment and last fall sent emails to about 3 million borrowers to notify them about income-based repayment options. James Runcie, the department official who oversees federal student aid, told Congressional lawmakers last month that the email campaign had resulted in almost 150,000 applications for the programs. 

 

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