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.