A Proposal to Radically Simplify Student Loan Payments

March 24, 2014
Bloomberg BusinessWeek 
student loan news
More and more U.S. college students are struggling to repay their loans, whether or not they actually graduated. Borrowers currently must begin repayment loans six months after leaving school, on a standard 10-year schedule. The government offers six other options, two of which can either extend payments over 25 years or keep the 10-year period with gradually increased monthly payments. Other payment plans are tied to how much the borrower earns.

A group of five organizations that includes the National Association of Student Financial Aid Administrators and Young Invincibles have proposed a streamlined, automated system for repaying loans. Their idea combines several suggested improvements to try to fix two problems: the complexity among the different options, and borrowers' relatively low participation in these plans. The group advocates income-based repayment, also known as “auto-IBR.”

The plan would change the default payment option to a repayment schedule that is tied to a percentage of the borrower’s income and that eventually forgives the remaining balance after a certain period of time. Payments may be automatically deducted from a borrower’s paycheck, similar to Social Security. One option for the proposed plan would require borrowers to pay 18 percent of everything they earn above $25,000 a year. Another would require 10 percent of income above $10,000 a year. There also may be longer terms for borrowers who take out more debt, to minimize giving a disproportionate benefit to students who borrow a lot and could see larger amounts forgiven.

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