Another Lie about Student Loans
A few weeks ago, I shared the NPR Article about the looming May 1 deadline for resuming student loan repayments. A snippet in THAT article touched on the tantalizing option of stretching out the loan payments. Here’s a detailed analysis of THAT option- Hint: don’t hold your breath.
An analysis by Anna Helhoski of NerdWallet bombs the idea of EVER getting your student loans forgiven through the highly touted Income-Driven Repayment plan, or IDR. Look up this article on the NerdWallet website if you want to see their charts. All items in bold were added by me for emphasis.
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Don’t Call It Student Loan Forgiveness: Income-Driven Plans Rarely Clear Debt
Income-driven repayment plans — a safety net within the federal student loan repayment system touted as a solution for federal borrowers struggling to pay back their loans — promises lower monthly payments and forgiveness after 20 or 25 years. But repayment projections calculated by NerdWallet show forgiveness is unlikely for most borrowers.
Among those who do eventually have debt forgiven, the resulting interest that accrues in the meantime is substantial, as much, if not more, than the amount forgiven, NerdWallet’s analysis shows.
And among borrowers who do receive some cancellation through income-driven repayment, higher income taxes also await.
Income-driven repayment is still the only tool for borrowers to make more affordable payments than on a standard, 10-year, plan. But over time, IDR is likely to cost borrowers more than they bargained for and is unlikely to result in the kind of debt relief that “forgiveness” promises.
Key findings
Only borrowers with starting salaries of $20,000 and $30,000 (rising 3% annually) will ever see their debt forgiven on $27,000 in unsubsidized federal student loans after making payments, without stopping, for 20 years.
Borrowers with starting salaries of $40,000 to $100,000 (also rising 3% annually) will pay off their $27,000 in unsubsidized federal student loans before they reach the 20-year mark that triggers loan forgiveness.
Most borrowers with high debt, $129,500, are more likely to see loan forgiveness through income-driven repayment, but they’ll accrue exorbitant interest at the time of forgiveness — often as much, if not more, than the amount forgiven.
Borrowers who do get their loans forgiven could face higher income taxes, even pushing them into higher federal tax brackets.
How income-driven repayment forgiveness works
When income-driven repayment works as intended, borrowers enroll in the plan and their payment amounts are set at a portion of their income. Borrowers with multiple loans must consolidate into one new loan prior to enrollment. The borrower’s timeline to repayment resets and they begin making payments on a 20-year or a 25-year plan, depending on the type of loans they have: 20 years for undergraduate debt or 25 years for consolidated loans that include graduate debt. Their payment amounts are expected to increase over time as their pay increases. Then they’re supposed to get forgiveness.
For this analysis, NerdWallet considered payments, interest and forgiveness for borrowers enrolled in Revised Pay As You Earn, or REPAYE. It was launched in December 2015 and is the most accessible among the four income-driven repayment plans for federal student loans.
REPAYE caps payments at 10% of a borrower's discretionary income and lengthens their repayment term. Discretionary income is calculated as their annual income minus 150% of the poverty line (equaling $19,320 in 2021) divided by 12 months. Borrowers enrolled in REPAYE aren’t scheduled to start seeing their debt discharged until 2035 at the earliest.
Whether a borrower sees their remaining debt forgiven after the repayment period ends will depend entirely on how much they borrowed, their interest rate, what their income is and how quickly their income rises over time.
This analysis measures outcomes for:
Two different debt loads, which are based on current federal direct loan maximums: $27,000 for undergraduates and $129,500 for those with graduate and undergraduate debt.
Consolidated interest rates calculated to reflect the last few years of rates that a borrower plausibly could have.
Nine potential starting salaries ranging from $20,000 to $100,000; we assume annual wages will rise 3% year over year during the payment term.
The effect on taxable income at a federal level for those borrowers who do reach the threshold for forgiveness.
The analysis, for consistency, assesses only the effectiveness of the program’s forgiveness component if borrowers stay on track with payments and their income rises steadily. It doesn’t take into account many situations borrowers may face through the life of their loan that could shift their expected payoff or forgiveness timeline, including pauses, loss in income or other factors that affect IDR calculations, such as the addition of a spouse’s income.
Few undergrad borrowers will see loans forgiven through IDR
Among those with $27,000 in undergraduate unsubsidized federal student loans, only borrowers with starting salaries of $20,000 or $30,000 would see their debt forgiven after 20 years of payments, the analysis shows.
Other borrowers who start with salaries ranging from $40,000 to $100,000 will never see forgiveness through income-driven repayment because they will have paid off their balance plus interest long before it’s time for forgiveness.
Borrowers who start with a $40,000 salary could pay off their debt in 149 months (roughly 12 years and four months) once their salary hits just over $55,000. For other borrowers it happens much faster: Borrowers who start with salaries of $50,000 or more will pay off their loans using income-driven repayment faster than even the standard plan, which takes 120 months and could result in savings on interest.
Borrowers with high forgiveness amounts accrue more in interest and face high tax bills
Borrowers with high amounts of federal unsubsidized loan debts (those with undergraduate debt who also attend grad school for up to five years) are likely to see forgiveness after 25 years. But they’ll accrue a significant amount in interest that’s well above the total principal amount, and they’re more likely to be stuck with a high tax bill on the forgiven amount added to their taxable income.
Through the end of 2025, any amount forgiven through income-driven repayment is not considered taxable income. This projection assumes that rule will not be extended.
The forgiveness component of income-driven repayment technically works, but at a high cost to the borrower. For example, a borrower with $129,500 in federal debt who has a starting salary of $50,000 may get $162,708 in debt forgiven after 25 years, but they’ll have paid $133,996 on their loan, accrued $167,857 in interest and paid $48,652 in additional taxes.
Borrowers with high incomes will pay off high debt before forgiveness
High income borrowers with high debt are unlikely to see forgiveness and will still accrue high amounts of interest over time.
What this means for borrowers
Income-driven repayment is still a safety net that can help borrowers lower their monthly payments. It’s certainly a better option than forbearance or deferment because IDR keeps borrowers on track to repayment or forgiveness. But borrowers must take into account the amount of interest they could expect to grow over time and shouldn’t necessarily expect forgiveness through IDR.
Borrowers considering income-driven repayment should plug their loan information into Federal Student Aid’s Loan Simulator, which will give borrowers a picture of their monthly bills, overall costs and potential forgiveness under each plan.
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There it is.
If you borrow, you will likely NEVER have the debt cancellation option at the end. And, If you do, you will need to borrow for the tax bill. IDR just offers a way to stretch things out to the end of forever. I know stories of parents still paying on their own loans when their kids are heading off to college.
The obvious bottom line- do everything on the front end, including not going into any of this blindly, to not borrow money for college. Get my book, ENOUGH! The College Cost Crisis for real ideas that can help you avoid this fantasy.
And one more thing- WHY is all of this NOT required to be disclosed in writing, as well as being explained by a non-affiliated financial counselor at every institution of higher education?
You know the answer. So do I. And shame, shame shame, on the colleges, universities, lenders, But there’s one more finger to wag- and that one is for the ADULTS who let their children sign away their future. Get a reality check- on your student, and on the system.
Next week, some good news from a real philanthropist!
Until next time,
All my best,
Bonnie Burkett
