By Kathryn Wing
April 24, 2014
Caption : Income-driven repayment (IDR) plans can help make debt more manageable and prevent default but making it the default plan or a mandatory repayment option may have unintended consequences, such as increased time most borrowers hold outstanding debt.     

Last week, The Institute for College Access and Success (TICAS) released a report regarding the income-driven repayment (IDR) plan for student borrowers, called Should All Student Loan Payments Be Income-Driven? Trade-offs, and Challenges.

The report finds that by making the IDR plan mandatory some unintended consequences may prevail.

TICAS was on the forefront of supporting for the IDR plan as a repayment option going so far as developing the policy framework and advocacy campaign. But now with some researchers and policymakers advocating the IDR plan be the only plan or the default plan available for repayment, TICAS is voicing concerns.

Lauren Asher, TICAS President and co-author of the report, points out the validity of the IDR plan in some cases, but the strain it can put on others.

“Income-driven repayment is a crucial option for federal student loan borrowers. It can help keep monthly payments manageable and prevent default, but it’s not the best choice for everyone,” Asher said. “If income-driven repayment were mandatory, some borrowers would end up carrying debt for many more years and paying more over the life of their loans. This could make them less likely to buy a home, start a family, save for retirement, or launch a small business.”

The report outlines addition problems of a mandatory IDR plan:

  • IDR can increase the amount of time that borrowers have outstanding debt, which could reduce access to other forms of credit and borrowers’ willingness to make other financial commitments.
  • Some borrowers end up paying more over the life of their loans under IDR than in a traditional repayment plan, even after adjusting for inflation.
  • Lessons from other countries’ mandatory IDR systems are not necessarily applicable to the U.S. For example, the Australian and U.K. systems were introduced to generate new revenue for public higher education systems that had not been charging tuition. In the U.S., tuition already accounts for nearly half of public college revenue.
  • Without significant reforms to current college accountability systems, mandatory IDR could inadvertently create a safe haven for schools that fail to serve students well.
  • Mandatory IDR could reduce pressures on government and colleges to make higher education more affordable, leading to even higher tuition and less need-based grant aid. Research shows that reducing upfront costs is the most effective way to increase college access and success.
  • Paycheck withholding could simplify or complicate student loan repayment depending on the borrower’s circumstances. It poses particular risks to those who have to work multiple part-time jobs, are self-employed, do not have enough savings to cover unexpected costs in a given month, or have an employer with limited administrative capacity.

The report then gives some policy recommendations including:

  • Streamlining current IDR plans into one improved plan that better targets borrowers who need help the most.
  • Making it easier for all borrowers to update their financial information in IDR.
  • Not treating debt discharged through IDR as taxable income.
  • Automatically enrolling severely delinquent borrowers in IDR.
  • Improving the timing, content, and effectiveness of loan counseling.

The IDR plan can prove very effective at helping those who have large amounts of student debt, but it may not be appropriate in all cases and even a bad choice for some who are managing their debt fine under a normal repayment plan.

Mandatory IDR may also hinder any advancement at properly addressing rising tuition costs and the mounting student debt crisis.

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