By Andrew Gillen
The Income Based Repayment (IBR) program, which took effect in 2009, is designed to lighten the student-loan burden for some students. The basic idea is to limit monthly payments to less than 15% of disposable income. If a student makes these payments for 25 years, any remaining balance is forgiven, meaning that taxpayers essentially pay the rest off. President Obama just announced his intention to lower this to 10% of disposable income and 20 years of repayment before forgiveness. These proposed changes, as well as IBR in general, are bad for the following 6 reasons.
1. IBR treats the symptom rather than the disease.
Perhaps the most fundamental reason to end IBR is that it is treating the symptom (excessive college debt) rather than the disease (excessive college costs). IBR is essentially trying to fix the problem of students borrowing too much for college... without stopping students from borrowing too much for college. All it does is say that the government will pay for some portion of it in the distant future. To steal a line from Wolfgang Münchau (though on a different topic):
"This is the equivalent of putting explosives into a can, before kicking it down the road."
Higher college costs are the ultimate problem, and IBR does nothing to address that. Moreover, if the goal is merely to try and make college more affordable, there are much better ways...
...to accomplish that than making vague promises of what we'll do two decades from now.
2. IBR rewards current politicians while sticking future ones with the bill.
No one has any idea what IBR will cost in the future. With a typical bill, the Congressional Budget Office (CBO) estimates costs and revenues for a 10-year window, and this is the consensus/baseline estimate of what a program will cost. Since the government won't have to incur any costs (loss of revenue) from forgiving loans for 10-25 years, IBR is being treated as a free program in spite of the fact that it could end up costing billions of dollars a few decades from now. This allows current politicians to claim to be helping students, while forcing future politicians to figure out how to pay for it. Needless to say, that is not a healthy way to make policy. If current politicians want to help borrowers, they should be the ones sacrificing other priorities to do so.
3. IBR encourages people to think they won't have to repay debt.
IBR essentially says to people, "Don't worry about how much you borrow, you won't need to repay it." This should sound familiar, as a big driver of the housing bubble was the perception that you wouldn't have to repay that risky mortgage because your house would be worth more in a few years and you could just refinance. One would think that after all of the collateral damage from the housing bubble collapse, we would not encourage people to think that their debts will disappear without having to be repaid. But one would be wrong when it comes to IBR.
4. IBR can increase total student repayments.
The standard (non-IBR) repayment plan entails paying off your loan over 10 years. By lengthening this to 20 or 25 years, it is possible that IBR could end up costing some students more over the course of their loan.
5. IBR is social engineering.
While regular people need to make payments for 25 years before loan forgiveness, borrowers who take a job in the public sector or with some non-profits have their debt forgiven after 10 years rather than 25. The message from the government is unmistakable - -we want you to get a public or non-profit job. Why does the government think it knows best where people should be employed or if such public service jobs provide more value to society than private sector ones?
6. IBR is unjust.
Suppose we have two identical students. One decides he can't afford pricey Ivy U, and attends lower-cost State U instead, graduating with modest student loans which he repays. The other borrows recklessly to attend Ivy U, enters IBR, and has his loans forgiven. The end result is that the State U graduate pays for both his and Ivy U's loans. How is this just?
Overall IBR is a terrible program. The sooner we end it the better.
Andrew Gillen is the Research Director of the Center for College Affordability and Productivity.