More than 12 percent of student loan borrowers are defaulting, even while there are other options — such as income-based repayment — available to them. Yet while IBR helps struggling recent grads out of a jam, it is quickly becoming a big burden for American taxpayers.
On Monday, POLITICO published an article explaining that more than half of the $1 trillion student loan debt isn’t being repaid, as 1 in 8 borrowers are going into default, as revealed by a report from the Consumer Financial Protection Bureau. The solution? According to the CFPB’s student loan ombudsman, Rohit Chopra, it’s income-based repayment.
“[Defaulting] can have serious consequences for their economic future,” he told POLITICO. “The troubling part is that many of those defaults could have been avoided if borrowers knew about their options and were able to easily enroll in them.”
IBR, or the similar Pay-As-You-Earn program, allows qualifying borrowers to cap their monthly loan repayments at 10 or 15 percent of their discretionary income. Then after meeting that requirement for 20 or 25 years, depending on the program, the remaining balance of a borrower’s loan is forgiven. And for those who go into government or nonprofit work, the deal is even sweeter. They only have to pay their loans for 10 years before they’re forgiven.
Neal McCluskey, associate director of the Center for Educational Freedom at the Cato Institute, agreed with Chopra’s assessment that IBR is a good solution for cash-strapped college graduates.
“It probably is a good deal for most debtors, especially if they’re on the verge of default,” he said.
McCluskey said that the biggest winners from IBR are students who attend graduate school or very expensive universities, thereby increasing the cost of their education and the likelihood they will have part of their loans forgiven. And, of course, those who go into public or nonprofit work instead of private, for-profit work.
“There’s an assumption I think held pretty broadly across society that people who go into ‘not-for-profit’ work are making a lot less money than people who go for-profit work, which is not the case,” he clarified. “And that somehow going into not-for-profit work, especially government work, is somehow extremely noble, while somebody who is honest about trying to sell a product or service for more than it costs to produce that thing is somehow selfish.”
But the more ‘winners’ who utilize the IBR system to have part of their student loans forgiven, the more the American public becomes ‘losers.’ Student loans that aren’t repaid by the borrowers will be repaid by — you guessed it — taxpayers. In 2010, McCluskey called it the “income-based taxpayer ripoff.”
McCluskey did note that most current graduates will likely be able to pay off their loans through IBR, instead of having part of them forgiven. Yet for some people, the IBR payments won’t even cover the interest on their loans, meaning they will have more debt forgiven than they originally borrowed, as the American Enterprise Institute noted in 2012. And as tuition continues to increase and graduates are having a hard time finding employment — much less employment that pays well — McCluskey predicts more and more people will utilize income-based repayment plans.
And that likely means taxpayers will be paying more and more as well.
A solution to the problem — one that helps student loan borrowers and taxpayers both — is difficult to find. McCluskey noted that there really isn’t a happy middle ground.
“These [students] have incurred an obligation to pay back taxpayers,” he said. “I don’t know that there’s anything you can do for them to make their burden easier without adding a burden to taxpayers who had no say in the matter.”
