The federal government’s Income-Based Repayment (IBR) program for federal student loans has been touted as a way for struggling borrowers to make affordable monthly loan payments based on their earnings. Yet the program, around since 2007, has not been popular with students. Despite rising levels of student debt, only 1.1 million borrowers are enrolled in the current program. The Obama administration is hoping that will soon change with its redesigned program, also known as the “Pay as You Earn” plan. It will reduce the cap on loan payments from 15 percent of the borrower’s income to 10 percent, and accelerate loan forgiveness from 25 years to 20 years. On Nov. 1, the Department of Education announced that the new IBR plan is now finalized, meaning students will be able to start enrolling in the new plan shortly.
The program’s new terms have been popular with student loan advocates, but there may be some significant flaws with its new design, suggests Jason Delisle, co-author of a new report on the changes. Delisle, who heads the Federal Education Budget Project at the New America Foundation, a nonpartisan public policy institute in Washington, D.C., helped develop a calculator that took a close look at how the changes to IBR will impact students, including those enrolled in MBA programs. Based on his findings, he’s recommended that the Department of Education make significant changes to the program so that benefits for students are more evenly distributed.
Bloomberg Businessweek’s Alison Damast caught up with Delisle this week and spoke with him about some of the surprising findings his IBR calculator revealed, and what the changes mean for students, especially current and future MBA students.
What motivated you to look into the impact these planned changes to the Income-Based Repayment Plan will have on students?
When the president and the White House started talking about the proposal to speed up the enactment date of the more generous IBR plan, I started thinking, Gee, this is a really big increase in the benefits because it is essentially a 33 percent reduction in borrowers’ monthly payment, or a 33 percent increase in their monthly benefits. We realized the only way to understand what this does is to build this calculator and run lots of scenarios. We were pretty shocked at what we found.
What were some of the findings that most shocked you, and who do you believe will benefit the most from these changes?
The big winners under this are graduate students because they can borrow a lot. This is a huge giveaway to graduate students, especially if they are earning high incomes after repayment. Undergraduates can’t borrow enough, so the change is very marginal to them. If you’re only paying $20 a month, a 33 percent reduction in monthly payments is not that big a deal. But if you are paying $800 a month, a 33 percent reduction is a big deal.
Can you give me a hypothetical example of how graduate students will benefit under the new IBR plan?
We have one example of someone who might look similar to an MBA student. He starts out with a starting salary of $90,000 and by the end of 20 years is making $243,360. Under the old IBR program, he’ll have paid $409,445 by year 25 and be forgiven $23,892 of his loan balance. Under the new IBR repayment plan he’ll pay less than half of that, or $202,299, and be forgiven $208,259 by year 20. The old IBR plan was punitive if you borrowed a lot of money, made you pay more over time and trapped you, so there were serious consequences to doing that. It was a downside and a pretty big risk, which is why you didn’t see people borrowing without regard to how much it will cost. The new plan essentially eliminates any downside or risk for that type of behavior, and cuts payments in half and then some.
Based on your findings, what would you tell students thinking about graduate school or getting an MBA? What is the best way for them to take advantage of this program?
My advice to people who are about to enter graduate school or get an MBA would be to borrow as much money as they possibly can through the federal student loan program. They shouldn’t use their own money, savings, or income to pay for it because the risks or the downside of this having real financial consequences for you, provided this program is in place, are almost zero. And to the extent that there are risks, they are well worth taking because the potential upside is pretty big on this.
Your report points out one law school, the California Western School of Law in San Diego that is already advertising the benefits of this program to students, and touting how it will reduce their monthly payments. Do you fear this will encourage graduate schools to raise their tuition, especially lower-tier schools?
You can imagine schools that are having problems enrolling students or getting them to pay tuition hiring financial planners to come on campus and do seminars. They’ll be able to tell them, Here is why you don’t have to worry about how much you are borrowing to pay for school, or here’s why you don’t have to worry if you don’t land a great job. This is money coming in the door for the schools and none of it is far-fetched. Some of this stuff looks like shady infomercial stuff, but it is a real program that is about to take effect.
(After publication, the California Western School of Law pointed out that the ad was published on the Advantage Group website, not by the California Western School of Law as reported. The ad has since been removed at the school’s request.)