Change How Borrowers’ Income-Driven Payments Are Calculated

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 (AGI) 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 change borrowers’ required payments in income-driven plans by changing the share of discretionary income used to calculate those payments, changing the definition of discretionary income, or changing the timing of loan forgiveness. 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. To simplify the analysis and align the options with recently proposed policies, CBO considered the Revised Pay as You Earn (REPAYE) plan to be the only income-driven plan available under all three options.

In the report Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options, CBO measured each option’s budgetary effects in relation to the costs of making the REPAYE plan the only income-driven plan. Here, by contrast, CBO measured the options’ effects in relation to its baseline budget projections, the same approach it would take in a cost estimate. (The estimates presented here are also included as supplemental information accompanying the report.)

Make REPAYE the Only Income-Driven Plan and Adjust the Share of Discretionary Income Used to Calculate Monthly Payments
Under the REPAYE plan, borrowers’ required monthly payments are 10 percent of their discretionary income.

CBO analyzed the effects of making that plan the only income-driven repayment plan and either increasing or decreasing the share of discretionary income used to calculate required payments by 2 percentage points. Increasing the share to 12 percent would decrease spending over the 2020–2029 period by $42 billion, in CBO’s estimation. Decreasing the share to 8 percent would increase spending over that period by $4 billion.

Make REPAYE the Only Income-Driven Plan and Adjust the Definition of Discretionary Income
In income-driven repayment plans, borrowers’ payments are a percentage of their discretionary income. Most of the plans define discretionary income as AGI above 150 percent of the federal poverty guideline for a borrower’s household. Policymakers have considered altering that definition in recent years.

CBO analyzed the effects of making the REPAYE plan the only income-driven plan and defining discretionary income as AGI over 125 percent of the federal poverty guideline or AGI over 175 percent of the federal poverty guideline. In CBO’s estimation, defining discretionary income as AGI over 125 percent of the federal poverty guideline would decrease spending over the 2020–2029 period by $35 billion. Defining discretionary income as AGI over 175 percent of the federal poverty guideline would decrease spending over the same period by $6 billion.

Make REPAYE the Only Income-Driven Plan and Adjust the Timing of Loan Forgiveness
The different income-driven repayment plans vary how long borrowers must make payments before their loans are forgiven. Both the income-contingent repayment plan and the original income-based repayment plan (for new borrowers before July 1, 2014) require borrowers to make payments for 25 years before receiving loan forgiveness. That time was reduced to 20 years in the Pay as You Earn plan and the updated income-based repayment plan (for new borrowers on or after July 1, 2014). The most recently introduced plan, the REPAYE plan, has different repayment terms for undergraduate and graduate borrowers—20 years and 25 years, respectively.

CBO analyzed how the costs of student loans would change if the REPAYE plan was the only income-driven plan and loan forgiveness was delayed or accelerated by five years. Delaying loan forgiveness by five years would decrease spending over the 2020–2029 period by $40 billion, in CBO’s estimation. Accelerating loan forgiveness by five years would increase spending over the same period by $6 billion.