Possible Winners and Losers in a Student Loan Proposal

Borrowers with low incomes (below $19,320 for a single person and $39,750 for a family of four in 2021) make no payments under existing income-based plans, so reducing the percentage of income paid will not help them.

Borrowers with modest incomes will pay less on their loans, although some will pay for longer. For example, Sandy Baum of the Urban Institute estimates that a borrower with $30,000 in debt and a starting income of $38,000 would pay for 20 years under a 5 percent plan instead of 15 years under the current 10 percent plan.

The size of the benefit would often be larger for people with larger debts. The hypothetical $30,000 borrower would be projected to save about $9,000, compared with $24,000 for someone with the same income who borrowed $50,000.

The borrowers with the highest incomes and largest debts — like doctors, lawyers and others with advanced degrees — would benefit the most. Under current policy, typical single borrowers with $150,000 in debt and a starting salary of $100,000 would eventually repay their full loan. Offering them a 5 percent plan would cut their monthly payments in half and provide a significant amount of forgiveness of remaining balances.

The Congressional Budget Office estimates that a more modest reduction in the share of income paid (to 8 percent from 10 percent) would cost more than $26 billion over the next 10 years, and most of the benefits would go to graduate student borrowers. A rough extrapolation would put the cost to taxpayers of a 5 percent plan at around $65 billion.

What are alternatives to a 5 percent repayment plan? One is to vary the share of income paid based on the borrower’s income. For example, borrowers might pay 5 percent of the first $10,000 of their discretionary income, and 10 percent on the amount above that. Or there could be an even more differentiated set of rates, akin to the U.S. tax system. This change would make payments more affordable for lower- and middle-income borrowers while avoiding billions in new subsidies for the relatively affluent.

Addressing the challenges most struggling borrowers face would require broader changes than tinkering with the share of income paid in a repayment plan that many borrowers don’t even know about. In some countries, borrowers repay directly through the tax withholding system, reducing the need for paperwork and loan servicing. But proposals to move to such a system in the United States have yet to gain traction.