A recent study run by the Department of Education generated new data pertaining to student loan debt. One of the major finds of the study was the increase in repayment rates among graduates; however, defaulted loans were also found to be on the rise from previous years. These points of interest were not the only takeaways from the study. A trend was discovered that was related to the rising increase in repayments.
Compared to previous years, the popularity of income driven-repayment plans has been on the rise. An income-driven repayment plan requires a borrower to pay a fixed portion of their income each month instead of a flat fixed rate on student loan debt.
In 2014, only 25% of student loan borrowers who were paying their loans used an income-driven plan to combat their student loans. During the next year, this number jumped 6% up to 31% of payments. Now in 2016, that proportion has risen further to 38% of student loan repayments and represents an more significant portion of borrowers.
While these trends connote something positive, they may not actually be as promising as they do at first glance. One fatal flaw of an income-driven repayment plan is what happens after the predetermined payment period. When this period ends, borrowers can discharge whatever remaining amount of loans are left. While this sounds great for the borrower, it is not ideal for tax payers who essentially cover the remainder of this debt.
Building on this, a large portion of these income-driven beneficiaries do not actually need the benefits of such a plan. The debt associated with income-driven repayment plans are on average over twice the amount of debt associated with fixed rate repayment plans. This indicates that these graduates attended some form of graduate school (or at least an expensive college), and borrowers with this background are less likely to need to rely on such a plan.
If they used a different plan, their chances of default are still low, yet they are still choosing a plan that eventually displaces their debt onto tax payers. At any rate, this is bad news for the public because these trends directly affect taxes.
These trends allude to increasing stress for the lower income borrowers. Default rates have increased over the past couple years along with the rise in income-driven repayment plans. It has been established that a large portion of income-driven plans are for higher income borrowers who are not likely to default on a loan. This indicates that the lower income portion of borrowers overall comprise the majority of defaulted student loans. Recent trends and analysis indicate that the income-driven repayment plan may not be benefiting the student loan situation as previously thought.