Recent graduates face a number of challenges, from landing their first job, to possibly relocating, and learning how to repay student loans. One recent proposal from groups like the National Association of Student Financial Aid Administrators (NASFAA), Young Invincibles, and the New America Foundation aims to make the latter a lot easier—at least for federal student loan borrowers who are just about to enter repayment.
Their proposal aims to simplify the choice of six available repayment plans for federal student loans in favor of just one income-based plan. It addresses three primary goals:
- Reduce defaults by automatically enrolling all new federal student loan borrowers in a single repayment plan based on income.
- Simplify the repayment process by collecting payments through an employer withholding system.
- Ensure schools provide value to students by instituting new institutional accountability measures based on students’ ability to repay their debt.
Overall, the so-called “Auto-IBR” (Income-based repayment) plan focuses on simplicity. Despite the need to possibly pay more interest over the life of the loan with such a plan, graduates like the flexibility and loan forgiveness component (loans are eligible for forgiveness after 25 years with the Income-based and Income-contingent repayment plans, 20 years with Pay As You Earn, and just 10 years if they work for a qualified 501(c)(3) non-profit or public service job under the Public Service Loan Forgiveness program).
What Auto-IBR Would Do
The existing loan repayment options are great—and Auto-IBR wouldn’t eliminate them—but having so many choices with different eligibility terms and income thresholds makes the process of selecting the right repayment plan a bit complex.
Auto-IBR also simplifies repayment by allowing borrowers who are about to enter repayment to repay their federal debts through their paychecks, similar to how Social Security and Medicare are paid (it’s also similar to the approach that the UK and Australia use). Doing so not only makes things easy, but helps mitigate the risk of borrowers falling into default—all while nudging graduates into a repayment plan that increases their monthly payments as their salaries grow.
How It Works
Consider the following common scenario: Currently, a student who plans on pursuing a career in public service and who may struggle to make her federal loan payments with the standard “10-year” repayment plan must first consolidate her loans in the Department of Education’s Direct Loan Program to qualify for public service loan forgiveness. Then, if she meets the income requirements for IBR or Pay As You Earn, she can select from the available plans that are subject to different eligibility terms and income thresholds.
The problem with this scenario is that it feels like the potential for cost savings and repayment flexibility are reserved only for the most diligent borrowers. The Auto-IBR plan would simplify this by automatically enrolling her into IBR.
Have an opinion about Auto-IBR? Share it in the comments!