Not even one week after I called the federal government’s Income-Based Repayment (IBR) plan a “bureaucratic, protracted Chapter 13 bankruptcy repayment plan,” and recommended that the government give debtors the real thing instead, a nonpartisan, nonprofit think tank, The New America Foundation (NAF), published a report titled, “Safety Net or Windfall? Examining the Changes to Income-Based Repayment for Federal Student Loans.” Using as its jumping-off point advertising that NAF researchers found on the website of a small financial planning company called The Advantage Group, the report recoils at the prospect of high-income law school graduates disproportionately benefiting from changes to IBR set to take effect in 2014, if not sooner.
The director of the NAF’s Education Policy Program even questioned whether the revised IBR would reinflate the law school bubble. Such fears are misplaced: The NAF report sensationalizes the changes to the program, and no evidence suggests that the pool of law school applicants will increase because loans may be even easier to handle.
A Mountain from a Molehill?
The NAF report essentially claims the changes to IBR will provide large financial windfalls to high-debt/high-income graduate and professional school debtors and encourage people to apply to expensive programs because they won’t worry about repaying what they owe in the future. The report makes several good recommendationsfor example, that the tax liability on canceled loans be eliminatedbut its most significant recommendations applicable to law school debtors involve requiring those with adjusted gross incomes above $33,510 to make loan payments equal to 15 percent of their discretionary income instead of 10 percent and allowing loan cancellation after 20 years only on debts of at most $40,000 while debtors owing more would have to wait 25 years.
There are two methodological problems with the NAF’s arguments. First, the report doesn’t explain why low-income debtors should see any greater benefit from changes to IBR than what they already receive under the current version. As it is, the program represents a substantial step up for low-income debtors from deferment, forbearance, and default. Indeed, at this point the substantive difference between IBR and default is paperwork, much to the benefit of the U.S. Department of Education’s three-year cohort default rate.
The report’s second flaw relates to its failure to weigh the program’s changes by the number of people it fairly benefits against the number who might receive windfalls. The number of high-debt/high-income beneficiaries of the revised IBR might be small (mostly doctors) compared to the number of high-debt/low-income beneficiaries who benefit from loan cancellation after 20 years instead of 25 (grad students). Choosing law school graduates from California Western School of Law (not to be confused with the for-profit Western State) as an example of how a potential IBR windfall can occur cuts against the NAF’s argument, because few of the school’s graduates are expected to earn high incomes.
