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Possible Winners and Losers in a Student Loan Proposal

admin by admin
July 16, 2021
in Loans
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Possible Winners and Losers in a Student Loan Proposal

The Biden administration is still debating when to end the pandemic pause on collecting payments on federal student loans, but it’s also looking ahead at broader changes to how Americans repay those loans.

President Biden’s campaign proposal was to cap loan payments at 5 percent of incomes instead of 10 percent, and he may try to do so by creating a new income-based payment plan through the regulatory process. (He has not expressed interest in canceling all or most student debt.)

Unlike traditional payment plans in which payments are the same every month (usually for 10 years), income-based plans have borrowers pay a set percentage of their income over a specified threshold.

The Biden proposal would have significant benefits for many people, but there could also be unintended consequences, including an increase in inequality.

Because of how the loan system is set up, a 5 percent cap would be unlikely to help those who need it most (borrowers with low incomes are already eligible for zero payments); would cause some borrowers to pay for a longer period of time; and would provide large new subsidies to relatively affluent borrowers.

Income-driven repayment arrangements have grown from a pilot program introduced in the 1990s to plans that roughly 1 in 3 borrowers now participate in. Over time, these plans have become more generous.

The Obama administration reduced the share of discretionary income borrowers pay to 10 percent from 15 percent, and it reduced the number of years payments are required (before any remaining balance is forgiven) to 20 years from 25 years for borrowers with only undergraduate loans.

 

Read more….

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