With nearly 1 in 6 student loan borrowers in default, the federal government is making changes to its income-based repayment plan to help borrowers with relatively high debt and low incomes keep up with their payments.
But a report released Tuesday by the New America Foundation, a nonprofit and nonpartisan policy institute, says the changes ultimately will provide only marginal help for low-income borrowers who are at the greatest risk of default.
Rather, the changes would provide big benefits to middle- and high-income borrowers, particularly for those seeking a graduate degree, the authors found. The report says that at least one financial planning company is telling law school students that the changes could allow them to write off $100,000 in student debt.
“If left unchanged, the program is set to provide huge financial windfalls to people who, far from being in need, are among the most financially well-off graduates in today’s job market,” the report says.
Asked about the report, Justin Hamilton, a spokesman for the Education Department, said in a statement that income-based repayment “isn’t necessarily right for everyone, but it can be an incredibly helpful resource for people struggling to manage their student loan debt.”
Because payments are based on a percentage of income, borrowers with low incomes can conceivably pay nothing each month and still remain current on their loans.
Under current rules, borrowers pay 15 percent of their discretionary income, based on a formula that is meant to exclude money spent on basic life necessities. The remaining balance and accrued interest is forgiven after 25 years of payments.
The Obama administration is tweaking the program to make it easier for some borrowers, by expediting changes that will reduce monthly payments from 15 percent of discretionary income to 10 percent and forgive outstanding balances after 20 years of payments, instead of 25 years.
Some participants will be eligible for the reduced minimum payments this month as well as the 20-year repayment term; the remainder will be eligible in 2014.
The New America Foundation report says the changes to income-based repayment could provide some benefits to all participants. But the primary beneficiaries would be high-income, high-debt participants who could make relatively small payments for 20 years and then have a large part of their debt forgiven, the authors said.
The foundation cites as an example advice given by financial planners such as the Advantage Group in California.
“Stop wasting your money on student loan payments,” says the Advantage Group website. The firm notes that an average graduate from California Western School of Law owes more than $145,000 in student loans, amounting to monthly payments of more than $1,690.
But the changes introduced by the Obama administration could allow a graduate making $70,000 a year to reduce monthly payments to $448 a month and “have over $100,000 of debt forgiven,” the Advantage Group says.
Terry DeMuth, chairman of the Advantage Group, said the firm was simply trying to help its clients benefit from the program.
The New America Foundation report recommends that the administration make changes that would focus the benefits of income-based repayment on lower-income borrowers and limit those for borrowers earning big incomes.
“If you are low-income, it doesn’t really give you a big bang,” said Jason Delisle, one of the authors of the study, which estimates that monthly payments for low-income borrowers would drop to $20, from $25, under the changes. “If you are high-income and have a lot of debt, this is a huge giveaway.”
Mark Kantrowitz, founder of finaid.org, a website about college finances, disputed the way the New America Foundation calculated some of its numbers. Nonetheless, he said he agreed with the premise.
“The design of the plan has the potential to misdirect some of the subsidies towards people who will be earning fairly substantial incomes,” he said. “The improvements don’t benefit the low-income students as much as the high-income students.”