Income-Based Repayment Reduces Student Loan Delinquency (But Don’t Oversell It)

A much-feted change to the federal student loan program in the past decade was the expansion of income-based repayment (IBR) plans, which allow borrowers to make payments on their loans as a share of their incomes. With over a quarter million student borrowers entering default on their loans every three months, proponents of IBR have portrayed the plans as a solution to the default crisis. Former Council of Economic Advisors Chairman Jason Furman went so far as to claim that “if everyone was in an income-driven repayment plan, nobody would default.”

Data from the Department of Education show that this line of thinking is only half correct. Among borrowers enrolled in the standard ten-year repayment plan, 18% are not currently making payments on their loans. For borrowers enrolled in one of the five income-based repayment plans, the delinquency rate is just 8%.

Source: Federal Student Aid Data Center. These data exclude borrowers in default; I use delinquency (defined as being 31 to 360 days behind on payments) as a proxy for loan nonperformance. Preston Cooper/Forbes

While this data does not imply a causal relationship, scholarly evidence has found a link between income-based repayment and lower rates of student loan delinquency and default.

Reducing student loan delinquency is not the same as eliminating it. The next chart portrays the same data as the previous, but in a different way. Among delinquent student loan borrowers, 18% are enrolled in an income-based repayment plan. That represents 473,000 student borrowers—enrolled in income-based repayment, but still falling behind on their loans.

Source: Federal Student Aid Data Center. These data exclude borrowers in default; I use delinquency (defined as being 31 to 360 days behind on payments) as a proxy for loan nonperformance. Preston Cooper/Forbes

The point bears repeating: nearly a fifth of borrowers who have become delinquent on their loans are guaranteed an affordable payment. There could be a number of reasons for this. Some borrowers may prioritize paying their student loans well below other obligations, such as utility bills or discretionary spending.

Yet for others, student loan nonpayment might not be linked to affordability at all. For instance, a borrower might feel cheated by his college and wonder why he should pay back the loans he took out to finance an education of unexpectedly low quality.