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College has never been so necessary or so expensive for Americans. Rising costs, state disinvestment, declining household incomes, and grant aid that has not kept pace lead more students to borrow, and borrow more, to go to school. While federal student loans are the safest option for students who need to borrow, rising student loan debt has repercussions for both individuals and the broader economy. In addition to the severe consequences for those who default, student loan debt--even low debt when paired with low earnings--can hold borrowers back from starting a family, buying a home, saving for retirement, starting a business or farm, or saving for their own children's education. While not a solution for rising costs or debt, income-driven repayment (IDR) for federal student loans gained broad support over a decade ago from lenders, students, schools, and both Republicans and Democrats. Since Congress passed the first widely available plan in 2007, IDR has become an increasingly critical option for students who have to borrow to afford college, and it continues to have strong bipartisan support. IDR plans now help millions of borrowers stay on top of their loans and avoid default, providing the assurance of manageable monthly payments tied to their income and family size, as well as a light at the end of the tunnel so that student loan payments do not last the rest of their lives. In addition to providing repayment relief to borrowers struggling with low incomes relative to their debt, the availability of more affordable payments through IDR can help allay well-documented fears about college costs and debt that keep some students from ever attempting college and push others to drop out before completing. However, the range of IDR plans available today--five of them, each with varying eligibility requirements, costs, and benefits--is confusing and contributes to under-enrollment among the borrowers who may need IDR the most. To better serve both borrowers and taxpayers, IDR must be both streamlined and improved. Needed improvements include simplifying the annual income recertification process in IDR, better targeting the benefits of IDR, and preventing forgiven debt in IDR from being treated as taxable income. This report details a proposal to streamline the multiple IDR plans into one improved plan that caps monthly payments at 10% of income, provides tax-free loan forgiveness after 20 years of payments, targets benefits to borrowers who need help the most, and prevents borrowers with high incomes and high debt from receiving loan forgiveness when they could have afforded to pay more. |
