A new study pertaining to the income-based repayment program from the Federal government has revealed somewhat negative results. While applications for these plans has increased over the years, the actual decline in defaults has only been reduced moderately. The original intention of income-based repayment plans was to reduce the default rate on student loans, but as mentioned before, this has not been the case.
Income-based repayment plans are extremely helpful to student loan debtors who have trouble making their monthly payments. If they qualify, borrowers reduce monthly payments to a small percentage of their monthly salary. After making payments for set number of years (usually 20 to 25 years), the remaining student loan balance is forgiven. These plans are helpful because they lower monthly payments and lead to partial loan forgiveness.
It is clear how this type of student loan repayment plan can be useful, especially to low-income drop-outs. As stated before, its main purpose is to lower the default rate, but this has not been accomplished to a satisfactory degree.
Why is this the case? Urban Institute reported that the majority of borrowers with an income-based repayment plan are not at serious risk of default. In short, the majority of applicants are not in trouble with their student loans which means the IBR program is missing the target demographic.
Instead of for-profit college graduates and dropouts, employed graduates with degrees are enrolling in the IBR program who technically do not need as much help with paying back student loans. In support of this point, a large majority of IBR participants have high credit scores which affirms the notion that these participants are not at risk for default.
The power of the IBR program is not to be underestimated. The default rate of IBR plans is 8% while the default rate of standard, unchanged plans is 19%. With that in mind, it is clear how well the IBR program performs. The question remains: Why aren’t these low-income debtors enrolling in the IBR program?
There are probably plenty of theories to throw around. One popular idea is that these candidates are prioritizing other debt over student loans; for instance, a credit card bill or mortgage seems more pertinent than a student loan, especially with the student loan forgiveness buzz from the election.
At any rate, student loan default is a serious issue which seems to be mentioned every day. It seems that the mounting student loan debt toll of over $1.3 trillion is not stopping anytime soon despite multiple helpful government programs. This issue is only exacerbated by the lack of desired participation in the IBR programs which has missed the target demographic thus far.