"innovations In Income-contingent Repayment: Exploring Australian Loan Models"

"innovations In Income-contingent Repayment: Exploring Australian Loan Models" - Adam Looney Adam Looney Non-resident Senior Associate - Economics, Executive Director, Marriner S. Eccles Institute, University of Utah.

As I wrote last week, Senator Warren's proposal to eliminate student debt and make public college free is expensive, retrogressive, and leaves many questions about what will replace student loans for the millions of students who use them for graduate school. in private colleges. , or to fund living expenses during enrollment.

"innovations In Income-contingent Repayment: Exploring Australian Loan Models"

I feel sorry for today's student loan borrowers—in fact, I'm outraged by the situation. It is unfortunate that the federal government gives out loans to students in substandard institutions even when we know that the schools are not increasing their income and that the borrowers will not be able to repay their loans. It's sad that we give parent PLUS loans to the poorest families when we know for a fact that they will default on their wages and social security benefits and have their taxes garnished, like $2.8 billion in 2017. It's really disgusting that we saddled several million students with loans to enroll in untested online programs, which appear to offer no job market value. It's unfortunate that our lending programs encourage schools like USC to charge $107,484 (and students enroll with confidence) for a master's degree in social work (220 percent more than the equivalent course at UCLA) in a field where the average salary is $47,980. No wonder many borrowers feel their student loans caused the financial crisis.

Credit Constraints, Collateral And Lending To The Poor [*]

In addition, this failure is the result of federal government policies. The federal government has established accountability laws; treated online programs as if they were equivalent to traditional brick-and-mortar schools; loans extended to students and parents well beyond financial need or ability to pay; and raising and then removing loan limits for parents and qualified students, allowing many to accumulate eye-popping, unpayable amounts. The government allowed—and often encouraged—people to make bad decisions.

If that is the whole story of the student debt problem, then yes, there would be a good case for scrapping the system, forgiving the loans, and starting over as Senator Warren suggested. But it's not. Many borrowers use the loan program responsibly to finance high-value investments. Among students in 2009 who had started college six years earlier, 44 percent had not borrowed at all and another 25 percent had borrowed less than $10,000. Only 2 percent had borrowed more than $50,000. In 'traditional' years 4. public and private institutions, student results are strong and fewer borrowers default on loans. At community colleges—which, thanks to grants, are already tuition-free—student loans for living expenses help students stay in school and complete their degrees. Federal loans are the largest form of aid we offer to graduate students. Like popular programs like Social Security, it is self-funded by its beneficiaries, with student benefits paid from former recipients, making it tax-resistant and reducing spending that has plagued many other social insurance programs. And the loans are fair because individuals who don't go to college aren't asked to pay for those who do, and they continue because we offer income-based repayment plans and eventually loan forgiveness for those who can't pay.

It is a system that deserves to be reformed. And it can be fixed. The simple, obvious, phrase of reformers should be "don't make loans that we know borrowers would suffer to repay." In practice, that means reversing many of the unwanted changes of the past two decades: Reinvigorate and strengthen the accountability system and apply it to all borrowers. Restore loan caps for graduate students and parents. Allow personal loans to be discharged in bankruptcy. Use an ability-to-pay limit on parental loans (or eliminate them altogether) and make exceptions for low-income students with grants and loans.

And then, and only then, should we provide relief for the burdens that the mistakes of the past two decades placed on students. We should provide relief that is fair, ongoing, does not cost hundreds of billions of dollars, and allows the best parts of today's credit system to continue. It is possible.

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The right approach implements universal and automatic income-based repayment plans for all borrowers and repairs the damage done to previous borrowers by failing to make those plans available in the first place. Under the current income-based Adjusted Payment As You Earn (REPAYE) program, borrowers pay 10 percent of their discretionary income (income below 150 percent of the poverty line) for 20 years (25 years for a qualified borrower). Any remaining balance is exempt (but subject to income tax).

REPAYE should be the default repayment plan, and all borrowers should immediately switch to this plan. (Borrowers making higher payments under a standard 10-year plan should opt out if they want to repay their loans faster.) Total and automatic payments would be more progressive, address borrowers' problems, lower costs, and provide a more sustainable way. of providing loans to future students.

Broad enrollment in REPAYE can fix some of the problems that borrowers face. For example, student debt has delayed or reduced homeownership rates for young borrowers—but mostly because of the impact of defaults and delinquencies on credit scores and access to mortgages. Research shows that enrolling in income-based programs like REPAYE reduces delinquency, improves credit scores, and increases the likelihood of homeownership among delinquent borrowers.

Auto-enrolment in REPAYE can be a gradual transition because repayment depends on income and family status; it prevents borrowers from facing payments that exceed a reasonable portion of their discretionary income. For example, the following table compares the distribution of annual payments of current borrowers (among households age 25 and older who are not enrolled in school) with a hypothetical scenario where all borrowers were enrolled in REPAYE.

Income Driven Repayment Overhaul Draws Praise, Criticism

The left-hand panel shows that on average, households with student debt pay about $2,501 a year in payments, but 34 percent are currently making no payments. On average, loan payments consume 3 percent of the household's gross income. Among borrowers who make payments (columns four and five), the average payment is $3,793 and consumes 4 percent of household income.

The amount of payments, the likelihood of making any payments, and the share of income devoted to loan repayments vary significantly among households based on economic and demographic characteristics. For example, low-income households (those in the lowest bracket) pay about $663 a year, in large part because 71 percent do not make payments. Among those who do make payments, however, the average amount is $2,261 and those payments consume 14 percent of their income.

For the hypothetical REPAYE program (right side of the table), I assume that households pay 10 percent of their discretionary income (up to a maximum of 125 percent of the amount borrowers would pay under the 10-year mortgage loan limit). significant influence). I assume that borrowers who are currently defaulting because they report they "cannot afford it" or because they are in forbearance continue to default. (Without this assumption, high-income and highly educated borrowers would pay more.)

Under these assumptions, the average household payment is the same: about $2,482 ($19 less than today) and 36 percent of households do not pay. However, the distribution of payments in households is quite different. The lowest income households do not make payments, while payments from higher income households increase. (In part, this is because high-income households' current payments are sometimes less than 10 percent of their discretionary income, perhaps because they are on long-term repayment plans.)

Income Driven Repayment: Is It Right For You?

In addition to lowering payments for low-income borrowers, REPAYE lowers payments for young households, less educated borrowers (except for some graduate and professional students—largely because I think defaulters keep deferring), and for African-American Borrowers. Every year, there is a chance that some borrowers who are currently in default will pay something or will pay when their economic situation recovers.

This analysis does not include the value of loan forgiveness granted from the remaining balance after 20 or 25 years (or after 10 years under public sector loan forgiveness [PSLF]), which depends on the combination of payments (and income and status family) above. many years. While loan disbursals to low-income borrowers may continue, disbursements to certain qualified borrowers or under public sector loan forgiveness may not. (So far, the typical PSLF beneficiary appears to be a highly educated, white-collar professional with an average of $62,515 in forgiven federal loans—about 70 percent more than we give the poorest Pell Grant recipient over their entire term . profession.) Overall, my guess is that forgiveness will be available to low-income households and middle-income borrowers with large debts.

Because it is not known what the final amount forgiven will be, it is not known what the total cost is. The fact that annual payments are roughly the same indicates that most borrowers will continue to repay their loans. However, others will only pay quickly; others who would pay more may have

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