• By
  • Josh Mitchell

The Obama administration has championed two programs that limit payments on student loans and ultimately forgive large chunks of debt. But with the use of these programs skyrocketing, the White House and others now want to limit how much student debt is forgiven.

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Here are some details on the plans and the proposed changes.

So what is income-based repayment, and do I qualify?

–The U.S. Department of Education has various programs to effectively lower payments for borrowers struggling to repay their federal student loans. The plans set a borrower’s monthly payment as a share of annual income, but the precise terms vary depending on when the loans were made. Newer borrowers pay 10% of their “discretionary income,” defined as the amount above 150% the poverty level. Older borrowers pay 15%. The vast majority of borrowers can enroll in one of the plans. Contact your loan servicer or the Education Department for details on which plan applies to you.

How long do I have to pay?

–Under these plans, most borrowers make payments for 20 years or 25 years, depending on how old their debt is. Then, any remaining balance is forgiven by the government. But the terms are far more generous for those working in public service, mainly government jobs and most nonprofit jobs. Those borrowers make payments for 10 years and then have any balance forgiven.

So what is the Obama administration proposing?

–Two things primarily. The White House wants all borrowers to have access to the most generous income-based repayment plan so they can lower their monthly payments, regardless of when they took out their loans. But it also wants to limit how much debt can be forgiven for individual borrowers at the end of the repayment period. The maximum amount forgiven would be $57,500 after 10 years, under the Obama budget plan. Borrowers who wanted bigger sums forgiven would have to pay over a 25-year window.

But wait, I thought the Obama administration liked income-based repayment? Why is it now proposing to limit the programs?

–The administration does like the idea of tying monthly payments to borrowers’ income, particularly for those in danger of defaulting. The White House views that part of the program as a key tool for keeping borrowers from damaging their credit and falling further behind as interest mounts. But administration officials do have concerns about how much debt could ultimately be forgiven for some borrowers. Groups such as the New America Foundation and the Brookings Institution, both centrist think tanks, are warning that the programs could benefit highly paid lawyers and doctors who don’t need the help, driving up taxpayer costs in very unpredictable ways. The administration wants debt-forgiveness to be available for the neediest borrowers while dissuading highly paid workers from enrolling in the program and then getting a taxpayer-covered windfall after 10 years.

How big could the programs ultimately get?

—Enrollment in income-based repayment plans is surging. In the final six months of 2013, enrollment grew by nearly 40% to 1.3 million borrowers. The amount of debt that slipped into income-based repayment rose at a similar pace to $72 billion. The government has a limited grasp of the long-term costs because the loan-forgiveness provision was created in 2007 and no knows how many borrowers will stay in public-service jobs or how much debt they’ll ultimately have forgiven. But Brookings recently performed one of the first comprehensive analyses of income-based repayment and debt forgiveness and concluded that the most popular plan could end up costing $14 billion a year. For now, the Education Department maintains that, on the whole, student-loan programs will generate revenue for the government because the interest paid by all borrowers, including those in a standard repayment plan, will outweigh the costs of income-based repayment and debt forgiveness.

Will these changes ultimately become law?

–They must first be approved by Congress, and the odds are long that legislation will get passed this year, given the November election and general inertia on Capitol Hill. But the federal Higher Education Act will ultimately have to be reauthorized, and given that both the Obama White House and some congressional Republicans are now talking about the need for changes to income-based repayment and debt forgiveness, momentum could ultimately build in Congress after the midterms.



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