AV Policy Brief
Congress appears likely to repeal the Biden Administration’s Saving for A Valuable Education (SAVE) plan and replace it with a new Income-Driven Repayment (IDR) plan. Income-driven repayment should be a safety net for borrowers, not a broad subsidy for higher education. At a minimum, an effective IDR plan should adhere to a few basic principles.
Congress Should Eliminate Widespread Loan Forgiveness
The SAVE plan promised extensive loan forgiveness, even for borrowers who get an earnings boost from their postsecondary degree and would otherwise repay their debt. Converting student loans into backdoor grants after the fact has little impact on student completion and earnings outcomes. Further, it encourages over-borrowing, subsidizes highincome borrowers, and blurs the financial obligation for students between grants and loans. Congress should replace the SAVE plan with a new IDR plan where all but the lowest-income borrowers repay their loans in full.
Income-Driven Plans Should Have a Progressive Payment Structure
High-income borrowers should allocate a larger share of income toward repaying their student loans than low-income borrowers. A progressive structure would allow borrowers to pay less toward their loans early in their careers and increase payments as their incomes rise over time. It also provides some protection if a borrower loses their job. Because high-debt graduate students often earn higher incomes, progressive payment structures reduce subsidies to borrowers who do not need them.
Repayment plans without a monthly payment cap help ensure that higher earners repay their loans. For example, borrowers paying a percentage of their discretionary income should continue paying that percentage as their income rises, even if their payment exceeds what a fixed monthly plan would require. Requiring borrowers to remain on an income-driven plan can prevent high earners from later switching to lower-cost plans.
IDR Plans Should Continue to Provide a Safety Net
Higher education provides a great deal of value to American communities and the broader economy, and it deserves taxpayer investment. While society benefits from more people enrolling in college, individual students take a risk when borrowing to afford a degree. Changing labor market demands or economic downturns could leave them worse off. IDR mitigates these risks. Any new repayment plans should continue to mitigate risks in the following ways:
- Protecting a baseline level of income: Households just below the poverty line (50 – 99% FPL) spend 47% of income on housing, and nearly 40% of households below the poverty line are food insecure. Many of these families would struggle to make even nominal monthly student loan payments. And when they default, they will lose access to other supports like Earned Income Tax Credit and Child Tax Credit. Income-driven payments should begin above a minimum level of income, adjusted for inflation. An effective safety net will allow borrowers to rebound from periods of low income and repay when their incomes rise.
- A time limit on repayment: The small number of long-term, low-income borrowers who are unlikely to ever fully retire their loans despite years of repayment should have a pathway out of debt. For these borrowers, the risk of borrowing for college has simply not paid off. Requiring life-long repayment adds little value, costing extra taxpayer dollars to administer the loans while creating economic hardship for borrowers. Federal resources would be better spent improving cost, quality, and return on investment for future students.
Borrowers Should Have Two Repayment Options
A simpler system would be easier for the federal government to administer and for students to navigate. The federal government should offer a streamlined loan system where new borrowers choose between a fixed-payment plan and an IDR plan with clear and transparent terms. It is reasonable to adjust some terms, such as repayment length and monthly payment, based on the amount borrowed.
IDR Reforms Should Be Paired with Stronger Accountability Standards
The SAVE plan would have provided large subsidies even to high-earning graduates, increasing incentives for institutions to raise prices and encourage their students to borrow. Such generous terms would also have allowed low-performing programs to flourish without pressure to deliver positive student outcomes. Strong accountability standards for college performance complement IDR plans. By ensuring higher education programs meet a minimum performance level to maintain eligibility for federal financial aid, Congress would reduce the proportion of borrowers who rely on IDR’s safety net
features.
