Last year, we demonstrated in painstaking detail that the Obama administration’s new Income-Based Repayment (new IBR) program for federal student loans, known as Pay-As-You-Earn, will be a boon to graduate students and the schools that enroll them. Because graduate students can take out federal student loans to pay for the full costs of their educations (including living expenses) using the Grad PLUS program, even students who go on to earn six-figure incomes will qualify for low payments under IBR and have substantial debt forgiven after 20 years.
Some observers might dismiss those warnings, arguing that such outcomes are outliers, something that will happen very rarely. But there are plenty of reasons why the new IBR’s graduate school benefits won’t go unnoticed or unused.
In fact, the evidence suggests that high-debt graduate students have already discovered the old IBR that has been available since 2009. According to data from the National Student Loan Data System, 10 percent of all borrowers enrolled in old IBR as of late 2012 have Grad PLUS loans. Yet Grad PLUS loans account for only about 2.5% of loans issued each year. (We excluded Parent PLUS loans from that count and used the number of loans issued as a conservative proxy for the share of all borrowers with Grad PLUS loans. However, the total universe of borrowers with Grad PLUS loans is likely an even smaller percentage of outstanding federal loans given that Grad PLUS is a newer program.) Thus, it appears that high-debt graduate students are significantly overrepresented among borrowers repaying through IBR.
What will those figures look like after the new IBR has been available for a few years and borrowers have had the chance to enroll, say in 2015 or 2016? If borrowers with lots of graduate school debt find the program beneficial now, imagine how they will respond when they learn that, compared with the old IBR, the new IBR would cut their monthly payments by a third and would most likely cut their total payments by half once they receive loan forgiveness.
Undergraduates, on the other hand, are unlikely to receive a big increase in benefits compared with the old IBR. Undergraduate students qualify for the new IBR, but they are limited in how much they can borrow in federal student loans annually and in aggregate. While the program will lower their monthly payments by the same 33 percent, their lower debt levels mean that they will likely fully repay their loans before they reach 20 years of payments and qualify for loan forgiveness. The new IBR simply allows them to make lower payments but for longer.
Graduate students, on the other hand, will have their outstanding debt forgiven under the new IBR before the delayed effect of making low monthly payments ever catches up with them. Mathematically speaking, 20 years of payments at 10 percent of income (minus IBR’s cost-of-living exemption) won’t repay a $100,000 loan at current interest rates, even for someone who earns a six-figure income for the majority of those 20 years.
And here is another reason for policymakers and student aid advocates to heed our warnings about the new IBR: The average size of a Grad PLUS loan is growing, much faster even than undergraduate Unsubsidized Stafford loans (which are capped) or Parent PLUS loans (which have no cap, but also are not eligible for IBR). That means even larger amounts of Grad PLUS loans forgiven.
The Congressional Budget Office estimated in February that the average size of a Grad PLUS loan taken out in 2014 will be $16,578. Added to a borrower’s $20,500 Stafford loan for that year, the average Grad PLUS borrower is expected to take out $37,000 per year in federal loans. By 2020, the number will hit $40,500. Given that most graduate and professional programs are two years or longer, the average debt (after in-school interest accrues) for a Grad PLUS borrow easily tops $70,000, even before factoring in any debt from undergraduate studies.
Using the New America Foundation’s IBR calculator, we found that once a borrower takes on $65,000 in debt, he bears none of the incremental cost of borrowing an additional dollar under the new IBR, even if he goes on to earn over $100,000 for most of his repayment term.* The extra debt will be forgiven. Pair that with the average borrowing figures released by the Congressional Budget Office, and throw in the overrepresentation of Grad PLUS borrowers in the old IBR, and our warnings hardly look like an exaggeration.
Lastly, the Department of Education offers this nugget, buried among hundreds of pages of regulations it released last year. The agency expects that 24 percent of borrowers who enroll in the new IBR will not fully repay their loans and have an average of $41,000 forgiven.
Working together, Grad PLUS and the new IBR are set to provide massive subsidies to graduate students, graduate schools, and employers who no longer need to pay salaries that justify the debt incurred to obtain a graduate or professional education. Should the Grad PLUS windfall under new IBR go unnoticed and unused as some skeptics claim, it will be the first time in history that the federal government offers $41,000 or $100,000 checks to the most educated segment of society and nobody shows up to claim them.
*This statement is true for a borrower who earns a starting salary of $65,000 (or less), plus a 3.5 percent (or less) annual raise for eight years; in year nine of repayment he earns $101,000 and a subsequent annual raise of 3.0 percent (or less); and, he has one child to claim as a dependent by year six of repayment. The borrower has $44,000 in Unsubsidized Stafford loans and $21,000 in Grad PLUS loans.