Senator Marco Rubio (R-FL) just announced that he paid off his student loans early with the proceeds from a book deal. Paying down debt ahead of schedule is generally a prudent financial move. But if the Obama administration’s new Income-Based Repayment (IBR) plan had been in place when Senator Rubio graduated from law school, his decision to pay down debt early would have been a sucker bet. Why pay early when your unpaid loans will be forgiven? That’s the financial choice countless graduate students will face in the coming years thanks to a now more-generous IBR plan that took effect on November 1, 2012, which is detailed in the New America Foundation report Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans.
We estimate that if the New IBR plan were available back in 1996 when Senator Rubio started repaying his student loans, he would have $83,482 forgiven in the year 2015. We developed that figure using Senator Rubio’s actual income information, which has been released publicly since the year 2000. We estimate the Senator’s loan balance at graduation to be $170,000 based on a press article that indicates Senator Rubio had $165,000 in student loans in the year 2001, five years after he left school. We also approximated income information for the years 1996 through 1999 and after 2010 because actual information is not available. The calculation also factors in a family size of two in his first year of repayment (himself plus his wife) and increases in the years each of his four children are born.
The table above details what Rubio would pay under the Old IBR plan – the one that pre-dates the Obama administration’s changes last month. Under that plan, borrowers pay 15 percent of their incomes (subject to a cap) toward their loans annually after a “cost-of-living” exemption equal to 150 percent of the federal poverty guidelines. Any debt remaining after 25 years of payments is forgiven.
Under the plan that took effect on November 1, 2012, which we call “New IBR,” borrowers pay 10 percent of their incomes after the exemption, and have any debt forgiven after only 20 years of payments. Recent student loan borrowers are eligible for New IBR. (We adjusted the cost-of-living exemption in the calculator to reflect the initial 1996 poverty guidelines and annual increases thereafter. We also set the interest rate on the Senator’s loans to reflect those under current law, as that rate reflects the repayment terms under today’s program and illustrates what a borrower today would pay.)
Our paper exploring the New IBR system found that the plan will provide significant windfall benefits to high-income, high-debt borrowers—benefits that the Old IBR did not provide. Marco Rubio’s loan and income data offer a prime example. In spite of his salary, which at its high point nearly hits $400,000 a year, he would be eligible to receive more than $80,000 in loan forgiveness, and to pay substantially less than he would under the consolidation loan repayment plan that he actually used, if he graduated today.
This is yet more proof that policymakers must amend the program to rein in its benefits and the incentives it provides to graduate and professional schools to raise tuition. Our paper outlines exactly how policymakers could accomplish that while preserving the safety-net function of IBR – and under that plan, Senator Rubio would receive no loan forgiveness, but would still pay far less than under consolidation. That’s a good deal for students.
So far, the Obama administration hasn’t said a word about the serious flaws of New IBR, and hasn’t stated whether it has any intention of addressing them. Maybe Senator Rubio can help the White House understand the issue. He could start by explaining to the President why a government check for $83,482 to forgive his student loans (or someone like him) isn’t the best use of taxpayer money.