Change the Availability of Income-Driven Repayment Plans

Background

Introduced as a way to make student loan repayment more manageable, income-driven plans reduce the required monthly payments for borrowers with low income or large balances and allow for loan forgiveness after 20 or 25 years. Under the most popular income-driven plans, borrowers’ payments are 10 or 15 percent of their discretionary income, which is typically defined as adjusted gross income above 150 percent of the federal poverty guideline. (Discretionary income is meant to reflect income after essential expenses, such as housing, food, and taxes.) Furthermore, most plans cap monthly payments at the amount a borrower would have paid under a 10-year fixed-payment plan.

Options

CBO examined three options that would simplify income-driven repayment, expand the use of income-driven repayment plans, or eliminate them altogether. Each of the policies would apply to borrowers who took out their first loan on or after July 1, 2020. Over time, as more of those borrowers began repaying their loans, the policies’ budgetary effects would increase.

Make the REPAYE Plan the Only Income-Driven Repayment Plan
Many policy proposals have sought to simplify income-driven repayment by reducing borrowers’ options to a single income-driven plan. Some borrowers are eligible for three or four different plans, and difficulties in choosing one may discourage those borrowers from enrolling in any of them. Under this option, the REPAYE plan would be the only income-driven plan available to borrowers who took out their first loan on or after July 1, 2020. In CBO’s estimation, the option would decrease spending over the 2020–2029 period by $23 billion.

Make the REPAYE Plan the Only Repayment Plan
Under current law, if borrowers do not select a plan at the start of their repayment period, they are automatically enrolled in the standard repayment plan, in which borrowers fully pay off their loan balance after 10 years of fixed monthly payments. Borrowers can select other plans for which they are eligible, but some research has suggested that borrowers are not aware of their options.

Under this option, borrowers who took out their first loan on or after July 1, 2020, would automatically be enrolled in the REPAYE plan when their repayment period began and could not choose any other plan. The policy would make the student loan program more like the student loan programs of countries such as Australia and the United Kingdom, where the only available repayment plans are income-driven plans. Making the REPAYE plan the only repayment plan would increase spending over the 2020–2029 period by $34 billion, CBO estimates.

Eliminate All Income-Driven Repayment Plans
Under this option, income-driven repayment plans would no longer be available for borrowers who took out their first loan on or after July 1, 2020. CBO analyzed this option to provide an estimate of the total cost of income-driven repayment plans, which would be equal to the savings that would come from eliminating them.

Eliminating income-driven plans would decrease spending over the 2020–2029 period by $122 billion, in CBO’s estimation. However, that estimate is very uncertain because the policy is a significant departure from current law. One source of uncertainty is the extent of the decline in borrowing: Some borrowers might not take out loans or even attend college in the absence of income-driven plans.