Potential winners and losers in a student loan proposal

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Low-income borrowers (below $ 19,320 per person and $ 39,750 per family of four in 2021) are not making payments on existing income-based plans, so lowering the percentage of income paid will not help them.

Borrowers with modest incomes will pay less on their loans, although some will pay longer. For example, Sandy Baum from the city institute appraisals that a borrower with $ 30,000 in debt and an initial income of $ 38,000 would pay over 20 years with a 5 percent plan instead of 15 years with the current 10 percent plan.

The amount of the benefit is often higher for people with large debts. It is estimated that a hypothetical $ 30,000 borrower would save about $ 9,000 compared to $ 24,000 for a person of the same income who borrowed $ 50,000.

Borrowers with the highest incomes and the largest debts, such as doctors, lawyers, and others with advanced degrees, will benefit the most. Under current policy, typical single borrowers with $ 150,000 in debt and $ 100,000 starting salary end up repay a loan in full… Offering them a 5 percent plan would cut their monthly payments in half and provide significant compensation for the remaining balance.

Congressional Budget Office appraisals that a more modest cut in the share of paid-in income (down to 8 percent from 10 percent) would cost more than $ 26 billion over the next 10 years, with most of the benefits going to graduate borrowers. A rough extrapolation would estimate the cost of the 5 percent plan to taxpayers at about $ 65 billion.

What are the alternatives to a 5% repayment plan? One of them is to vary the proportion of paid income depending on the income of the borrower. For example, borrowers may pay 5 percent of the first $ 10,000 of their discretionary income and 10 percent of the excess. Or there may be an even more differentiated set of rates, similar to the US tax system. This change would make payments more affordable for low- and middle-income borrowers, while avoiding billions of new subsidies for the relatively wealthy.

Addressing the problems most troubled borrowers face will require broader changes than changing the share of income paid in repayment, which many borrowers are not even aware of. In some countries, borrowers make payments directly through the tax withholding system, which reduces the need for paperwork and loan servicing. But proposals to move to such a system in the United States have not yet received support.



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