Student Loan Repayment Plans Could Cost Borrowers More
Career College Central summary:
Income-driven repayment provides a reprieve for struggling borrowers trying to pay back their student loan debt. But some policy experts say the federal program offering such plans is not as effective as it could be, and can actually end up costing student borrowers more in the long run.
Under the Income-Based Repayment plan, monthly payments for those who enroll are capped at 15 percent of their incomes and after 25 years, any remaining debt is forgiven. And under the "Pay As You Earn" option, monthly payments are as low as 10 percent of a borrower's disposable income and debts are forgiven after 20 years. Because such plans are fairly underutilized, there's been a push to make income-based repayment the default option for all borrowers or at least to open up the plans to everyone, as President Barack Obama proposed in his 2015 budget.
But making income-driven repayment mandatory – or requiring borrowers to "opt out" – could have negative unintended consequences, according to a new report from the Institute for College Access & Success.
"Income-driven repayment is a crucial option for federal student loan borrowers. It can help keep monthly payments manageable and prevent default, but it's not the best choice for everyone," Lauren Asher, president of TICAS, said in a statement. "If income-driven repayment were mandatory, some borrowers would end up carrying debt for many more years and paying more over the life of their loans."
For example, the total payments for a borrower with $29,400 in debt who makes $35,000 annually would be 26 percent higher under "Pay As You Earn" than total payments under a 10-year standard repayment plan, the TICAS report found. Additionally, having that higher debt burden for a longer amount of time could make borrowers more likely to delay buying a home or car, saving for retirement, starting a family or launching a small business – all things that could be beneficial to the economy.
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