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Simpler Isn’t Always Better for Student Loan Borrowers

It’s been ten years since Congress updated the Higher Education Act (HEA). A lot has changed in the last decade, including the options available to borrowers to repay their loans. A lot of those changes happened at the administrative level, but this year Congress has started talking about HEA reauthorization. We have a real opportunity to make those repayment plans simpler and more friendly to borrowers.

Earlier this year, Young Invincibles submitted comprehensive comments to the Senate HELP Committee recommending how to re-authorize HEA, and late last year, the House Education & Workforce Committee approved their version of reauthorization, entitled the Promoting Real Opportunity, Success, and Prosperity Through Education Reform (PROSPER) Act. That bill would make many changes to our higher ed system, including streamlining the various federal loan programs with the ONE loan program.

Borrowers would have two options to pay back that loan: the 10-year amortization plan, which borrowers are currently automatically entered into, and a new income-driven plan. Depending on how you count them, today’s borrowers have to choose between eight different repayment plans, which is too many. So we support simplifying the options. But how does this one option compare to current, more borrower-friendly options, like Pay As You Earn?

Our analysis finds that the repayment plan described in the PROSPER Act would cost the typical borrower nearly $15,000 more to repay their loans than under current law.

The new income-driven plan will set payments at 15 percent of a borrower’s discretionary income that falls above 150 percent of the federal poverty rate. So for a single filer, take that person’s income, and subtract $18,090 ($12,060, the poverty level for a one-person household, multiplied by 1.5). That’s similar to current plans, but a less generous threshold; Under the currently available Pay As You Earn (PAYE) plan, borrowers pay only 10 percent of their income. Under PAYE, the government also forgives whatever you owe after 20 years of repayment. The House bill eliminates student loan forgiveness altogether.

Two other differences: In the House bill, if a borrower’s income is below that discretionary income threshold, the borrower still has to pay a minimum monthly payment of $25. There’s no such minimum in the current plans. Also, the House bill stops interest from accumulating once you’ve paid as much as you would have under the 10-year standard plan. That’s an important feature, because the longer you take to repay a loan, the more interest accumulates. But this also means that struggling borrowers aren’t going to save any money in the long run by enrolling in this plan instead of the 10-year plan.

So what does this mean for actual borrowers? That depends on the income they earn, when they earn it, how much they borrowed, and at what interest rate. That’s going to vary a lot. But looking at a “typical” borrower, these changes will cost borrowers thousands of dollars more for the exact same loan in today’s PAYE plan.

Under current law, a typical borrower with a $37,172 loan balance (the average loan amount for borrowers in the class of 2016) enrolled in PAYE will have paid back $31,795 in principle and interest after twenty years. The government forgives the remaining $31,030 (that forgiveness is taxed as income, but that’s a separate problem). Under PROSPER, that same typical borrower will pay off their loan four months earlier, but be charged a total of $46,297, nearly $15,000 more for the same loan. Along the way, the borrower will pay, on average, $54 more per month. That $54 each month, adds up to $646 per year; money that could be used for emergency savings or put towards a down-payment for major purchases.

Proposed changes to student loan repayment plans


Current (RePAYE)


% of discretionary income you pay



Total repaid for loan



Average payment






Months in repayment



*Assumes $37,172, average loan amount for borrowers in class of 2016

**Assumes the starting median income of 22-year-old with bachelor’s degree ($24,000) with a 5% annual rate of growth

Considering the importance of a college degree, the increased rate and level of borrowing, and the serious disparities between African-American students and their white peers’ ability to repay their loans, we should be making it easier for students, particularly low-income students, to repay their loans. While the PROSPER Act would make incremental progress simplifying our system, the bill would cost thousands of dollars for student borrowers. It’s also cruel to continue to force repayment two decades after a student has left school. Students deserve better.

Other Recommendations

YI recently submitted comments to the Senate HELP Committee to inform their version of HEA reauthorization. In those comments, we lay out other student-driven principles for reforming student loan repayment. In addition to maintaining the rates and protections in the PAYE system, we also recommend:

  • Rename “standard plan” to avoid bias towards defaulting to that plan regardless of financial advantage. It should be called “ten-year plan” or “time-based plan. ”
  • Fund pilot programs to evaluate the automatic enrollment of borrowers into income-driven plans.
  • Implement multi-year consent for borrowers to eliminate the annual recertification process for income-based repayment plans.
  • Eliminate the tax penalty on loan forgiveness.

Assumptions about “typical” borrower

  • The graduating class of 2016 took on average of $37,172 in debt, so we use this as the amount borrowed.
  • The most recent interest rates for direct undergraduate loans are 4.5 percent.
  • According to the Census’ Current Population Survey, twenty-two year-olds with a bachelor’s degree earn a median income of $24,000.
  • The government assumes a 5 percent growth in annual income for student borrowers, and a 3 percent growth in the federal poverty level, so we adopt those rates.