Income Based Repayment (IBR) is a ‘moral hazard’ for high-income student loan borrowers

by Grace

The new and improved Income Based Repayment (IBR) plan that went into effect last month is expected to benefit higher-income borrowers the most while offering only marginal assistance to low-income borrowers.

…  the New America Foundation, a nonprofit and nonpartisan policy institute, says the changes ultimately will provide only marginal help for low-income borrowers who are at the greatest risk of default.

Rather, the changes would provide big benefits to middle- and high-income borrowers, particularly for those seeking a graduate degree, the authors found. The report says that at least one financial planning company is telling law school students that the changes could allow them to write off $100,000 in student debt.

Changes to produce more generous IBR provisions were expedited by the Obama administration to take effect two years earlier than originally planned.

At least one financial planning firm, the Advantage Group, is capitalizing on the IBR features by advising clients on how they can avoid paying back portions of their student loans.

“Stop wasting your money on student loan payments,” says the Advantage Group Web site. The firm notes that an average graduate from California Western School of Law owes more than $145,000 in student loans, amounting to monthly payments of more than $1,690.

But the changes introduced by the Obama administration could allow a graduate making $70,000 a year to reduce monthly payments to $448 a month and “have over $100,000 of debt forgiven,” the Advantage Group says.

Terry DeMuth, chairman of the Advantage Group, said the firm was simply trying to help its clients benefit from the program.

A “huge giveaway” for high-income borrowers

The New America Foundation report recommends that the administration make changes that would focus the benefits of income-based repayment on lower-income borrowers and limit those for borrowers earning big incomes.

“If you are low-income, it doesn’t really give you a big bang,” said Jason Delisle, one of the authors of the study, which estimates that monthly payments for low-income borrowers would drop to $20, from $25, under the changes. “If you are high-income and have a lot of debt, this is a huge giveaway.”

Mark Kantrowitz, founder of, a Web site about college finances, disputed the way the New America Foundation calculated some of its numbers. Nonetheless, he said he agreed with the premise.

“The design of the plan has the potential to misdirect some of the subsidies towards people who will be earning fairly substantial incomes,” he said. “The improvements don’t benefit the low-income students as much as the high-income students.”

A “moral hazard”?

JASON DELISLE, DIR., FED. EDUCATION BUDGET PROJECT, NEW AMERICA  FOUNDATION:  You’ve got a moral hazard.  You’ve got an incentive to borrow away knowing that you’re not going to have to pay it back.

SYLVIA HALL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here’s how it can be a problem—graduate students can borrow an unlimited amount of money to pay for school.  They start their careers with small or moderate salaries, making monthly payments of 10 percent of their income.  But remember, grad students often become very high earners, like doctors and lawyers.  As their salaries increase, the monthly payments on the student loans are capped based on the borrower’s debt at graduation.  That means when the debt is forgiven, there could be a whole lot left.


How Much Student Loan Forgiveness Would Senator Rubio Qualify for Under New IBR Repayment Plan?

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….

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….

Don’t forget that forgiven student debt is taxable income, at least for now.

3 Responses to “Income Based Repayment (IBR) is a ‘moral hazard’ for high-income student loan borrowers”

  1. Yeah, there’s no incentive not to borrow big if there’s eventually loan forgiveness.


  2. The student loan bubble is comming, and it’s going to kill the industry. And maybe that’s not such a bad thing.



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