Better Late Than Never? Income-Based Repayment and Its Effects on Individuals and the Economy

Abstract

In 2016, the United States spent 2.3 percent of the value of its Gross Domestic Product in education spending. However, from the 2008-2009 schoolyear to the present, the total amount for tuition, fees, and room and board has increased by 2.3 percent and 2.6 percent per year on average for private four-year and public four-year institutions, respectively. Because of the limited amount of government money available for need-based grants, student loans have become increasingly necessary for many students to afford higher education.

Traditionally, student loans have been repaid in the same way as mortgage payments; the total amount borrowed is divided into the number of loan years, then the same standard monthly payment, plus interest, is paid every month. Many have argued that these traditional repayment plans place a heavy burden on students, potentially changing their career plans to avoid risky income prospects. Additionally, opponents of standard repayment plans claim that these plans increase the probability of default for students who cannot afford them, putting a strain on the economy and taxpayers as a whole. An alternative to standard loan repayment plans, “Income Based Repayment” (IBR) was originally introduced in England and Australia and adopted in the United States in the late 2000s. IBR allows an individual to pay a certain percentage of their income every month towards their loans, instead of a fixed amount.

Through linear probability models, logit regressions, and linear regressions of the 2016 Survey of Consumer Finances (SCF) survey data, this paper analyzes the demographic of individuals that participate in IBR programs and studies the potential significant factors which determine whether an individual enrolls in an IBR program. Furthermore, this paper provides an analysis of the connection between IBR programs and an individual’s financial well-being. A discussion of how IBR programs affect an individual’s financial characteristics will be included.

This paper finds significant correlations between certain characteristics, such as lower income, a higher level of federal education loans, unemployment, and ownership of a credit card, and participation in IBR programs. Additionally, associations between Black, Asian, and unmarried individuals and IBR participation are found as well. Furthermore, this paper shows a significant correlation between IBR and various financial characteristics, such as: owning a credit card, owning a debit card, and having a foreclosure proceeding brought against an individual’s property. This study adds to literature by providing a updated discussion of which individuals are enrolling in IBR, why they might be doing so, and how IBR might benefit or disadvantage the individual.