Pros & Cons of Income-Based Repayment for Student Loans

Income-based repayment has been offered since 2007 as an option to help struggling student loan borrowers avoid delinquency or default by lowering monthly payments to 10% to 15% of their income.

Given the serious consequences of loan delinquency and default to borrowers’ credit, some college financial aid administrators are advocating for income-based repayment to be the automatic repayment plan for students.

“By allowing the income-based repayment to be the initial – the automatic repayment plan – it ensures that no students would have a loan repayment that would exceed their ability to repay, therefore reducing the default rate,” said Marian Dill, Director of Student Financial Aid at Lee University in Tennessee. “It simplifies the process. It makes it more user-friendly for the borrower, and it ensures their ability to repay.”

However, there are some concerns about making the income-based repayment plan universal for all students.

Dr. Michelle Cooper, President of the Institute for Higher Education Policy, pointed out that because the monthly payments are lower and stretched out over a longer period of time, some students may end up paying more in interests.

Cooper also said that more safeguards need to be in place to prevent “bad actors” from using income-based repayment to “take advantage of the most vulnerable students.”

“While I definitely believe that there is some promise in this maybe down the road, until we work out and refine these kinks, that could ultimately hurt students more,” said Cooper.

Sen. Tom Harkin (D-Iowa) said while he thinks income-based repayment plans can be helpful for certain borrowers, he expressed concern that making it the default repayment plan would raise the cost of borrowing for students.

“The problem that I have with it is sometimes people will take the easiest course out, which means they lower their payment. Even though they can pay more, they stretch it out, and what they do over the time, they wind up paying more in interest charges rather than on the principal,” said Harkin.

Cooper urged lawmakers to be mindful of the big picture on why it’s important to help students repay their college loans quickly and with the least amount of costs as possible. She pointed out that many young adults are delaying or deferring important life choices, like purchasing a home or saving for retirement, due to student loan debts.

“As we extend even some of our repayment options to 20-25 years we have to recognize that then delays the students’ ability to make some life choices,” said Cooper. “We want our students to be effective and active parts of our economy. We don’t want them saddled with debt for first 20 years out of college.”

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