‘Repayment’ plan = loan forgiveness

President Obama’s more generous plan for income-based repayment of student loans means “typical undergraduate borrowers will not repay their loans,” writes Andrew Gillen, now research director at Education Sector.

Using the New America Foundation’s IBR calculator, Gillen looks at repayment for average student borrowers, who run up $26,600 in debt, and starts work at $27,000 with 3 percent salary growth per year.

To pay off the debt in the standard (10 year) plan, their monthly payment would be $307. But under IBR, their monthly payment in the first year drops to $63, which doesn’t even cover the interest on the loans (meaning their balance is growing over time). Over the 20 year life of the loan, they will repay less than what they borrowed (<$23,000), and will have over $40,000 of debt forgiven (paid by taxpayers).

Even if their starting salary is $35,000, they will still end up having $20,000 of debt forgiven. Moreover, borrowers who become parents during their loan repayment will find their monthly payments are reduced drastically. If the $35,000 starting salary graduate has children 5 and 7 years into repayment, they will repay much less than the principal of the loan (total payments <$18,000) and will have more than $45,000 of debt forgiven (paid by taxpayers).

Many borrowers won’t repay the principal, let alone the interest.

The priorities are skewed, Gillen writes. While low-income students will get $22,000 in Pell Grants to attend community college, upper-middle-class students will get a (delayed) grant of $40,000 or more, a gift from the taxpayers.

Big borrowers — those who’ve chosen a high-cost private college or earned a professional degree — get the best deal, notes the New America Foundation in Safety Net or Windfall?

. . .  contrary to benefitting low-income borrowers, the pending changes to IBR will actually provide generous benefits to borrowers with higher federal loan balances – those with graduate or professional degrees. A borrower with an MBA or a law degree can easily have a six-figure loan balance forgiven, even if his income exceeds $100,000 for much of his repayment term.

IBR treats the symptom (high college debt) rather than the disease (high college costs), Gillen writes on Minding the Campus. He favors income-contingent lending (ICL), which actually requires repaying loans.