Student Financing + Flexibility = Income Driven Repayment Plans
By: Pat Zancolli
Over the years since the student loan system has existed in higher education, the repayment model has gradually shifted from a standard model to an income-based one. As the Lumina Foundation series Looking Back to Move Forward most recent chapter explains, the push in an income-based direction has grown in recent years due to Obama-era efforts, but the system has actually been evolving in this way since the 1990s.
At this point in time, there are 8 different types of repayment plans available to students who borrow: Standard Repayment, Graduated Repayment, Extended Repayment, Revised Pay As You Earn Repayment (RPAYE), Pay As You Earn (PAYE), Income-Based Repayment (IBR), Income Contingent Repayment (ICR), and Income Sensitive Repayment.
The 1990s saw the creation of the first four alternatives to standard repayment plans: Extended, Graduated, Income Contingent, and Income Sensitive.
The Extended Repayment Plan allowed students to repay their loans with either fixed or graduated incomes over 25 years, while the Graduated Repayment Plan permitted borrowers to make smaller monthly payments that increased by a fixed amount every two years for up to a decade.
On the other hand, the Income Contingent Plan adjusted reduced monthly payments based on gross income and provided the option of debt forgiveness after twenty-five years. This option was not extended to Federal Family Education Loan (FFEL) borrowers, so Congress created the Income Sensitive Repayment Plan in order to allow greater flexibility to borrowers opting to use this program. Currently, the Income Sensitive Plan sets payments based on annual income for up to fifteen years.
From 2007 to the present, three more alternatives to standard repayment plans emerged, these three even more highly driven by income. Prior to Obama entering office, Congress in 2007 created the Income-Based Repayment (IBR) Program. IBR allows borrowers who are facing a financial hardship to reduce monthly payments for a while they are facing this hardship.
After this, the Obama Administration announced the Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) Plans, expanding income-driven repayment plan options to student borrowers. These two plans cap payments at 10% of monthly income and allow for loan forgiveness after twenty or twenty-five years.
The end of the Obama and beginning of the Trump administrations poses an interesting question: where will the future of student debt repayment go from here? Will President Trump continue the growing trend toward formalizing income-driven repayment plans, or will he try to do something totally different?
In the context of a new administration and Congress, an alternative to traditional student loans known as income-share agreements (ISAs) are gaining traction in the higher education financing space. The idea behind ISAs is that a student borrows money to finance his or her education, and in return, he or she pays back a portion of income over a set period of time. Colleges and universities such as Purdue University and Lackawanna College are experimenting with this model, as well as other private sector groups looking to provide students with greater financing options.
Income-share agreements are ultimately the strongest form of an income-driven student debt repayment model we have seen to date. Since students repay a share of their income, they should hypothetically never pay more than they can afford. Also, many current models have a threshold in place in which if a student is earning below, they do not have to pay back at that time.
It will be interesting to observe if and when the Trump administration and Congress decides to address income-share agreements at the federal level. Currently, there are two stalled bills in the House and Senate seeking to regulate ISAs, but President Trump’s Department of Education has made little effort thus far to change the system of higher education financing.
Will federal efforts in this administration further push the student debt repayment system along the income-driven path it has taken both over the past twenty or so years and under the Obama administration? Only time can tell.
