Income-Based Repayment Plans (IBRs) are sometimes touted as the best alternative student loan forgiveness, potentially helping to reduce the debt burden owned by millions of American student borrowers.

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A recent article of the National Bureau of Economic Research (NBER) suggested that expanding existing IBR plans and making them more generous might be more effective in providing relief than forgiveness, especially for middle and low-income borrowers.

But IBR plans, which are tied to borrower incomes, “underestimate the default crisis,” Marshall Steinbaum of the Jain Family Institute wrote in a report. recent report. The optimism that the IBR’s plans will address the student debt crisis, argued Steinbaum, rests “on the false assumption that entering the workforce allows borrowers to achieve creditworthiness.”

Ultimately, according to Steinbaum, there will have to be “inevitable cancellation because the debt will not be repaid.”

A recent Wall Street Journal article corroborates this argument: The Department of Education expected a staggering loss of $ 435 billion on the $ 1.37 trillion in student loans held by the government as of January 2020, according to a government analysis obtained by the Wall Street Journal. Find out the best loan offers in Green Day Online.

And according to the latest Annual Report According to Federal Student Aid, which manages the trillion-dollar student loan portfolio, the loan balances in repayment had increased between 2016 and 2019 before the coronavirus pandemic in 2020 put a pause on loans. loans guaranteed by the federal government.

2020 has led to a pause in payments on federally guaranteed loans and a surge in “defaulted” loans. (Federal Student Aid Annual Report 2020)

The break, which started in March and was recently extended, means borrowers haven’t seen interest on their loans accumulate – and they haven’t been required to repay debt.

Digging even deeper into the data, the vast majority of student loans – around 90% or $ 1.18 trillion – are currently in “default / bankruptcy / other status” amid the federal hiatus.

And it’s unclear how the FSA will get these borrowers back on track for repayment when the payment break expires on January 31, 2021.

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Already, lawmakers have called for a further extension of this relief.

“There are tough months ahead, and I will continue to fight to give student loan borrowers the peace of mind they need to breathe easier,” said Senator Patty Murray (D-WA) in a press release last week.

Who is on an income-based repayment plan?

The IBR program, also known as Income Based Reimbursement, was created as part of the Bush administration, to help borrowers repay their student loan debt. The Obama administration has expanded the program.

Payments have been capped at 10-15% of borrowers’ monthly income. After making regular payments for 20 to 25 years, the program promised, a borrower’s debt would be discharged.

About 7 million borrowers are taking advantage of these programs to repay about half of the $ 989 billion in outstanding federal student loans, the Government Accountability Office (GAO) reported in March 2020.

A previous report of the Congressional Budget Office (CBO) also noted that based on a breakdown of statistics for 2017, around three-fifths of the debt repaid under IBR programs was incurred by graduate students (who are generally more in debt. ).

And while income-based repayment plans have been offered as a way to help borrowers get off student debt, two experts said the plan is unlikely to work unless a big reform is made. imminent.

IBR plans were “designed to address a liquidity crunch: as students graduate with more debt, they may not earn enough immediately after entering the workforce to pay them off,” Steinbaum explained. , adding that the government wanted to relieve those with high levels of student loan debt repayment.

Steinbaum acknowledged that these programs initially prevented delinquency and default. But they “will never succeed as a solution to the student debt crisis,” he stressed, “because they are designed to solve a liquidity problem rather than the real problem – solvency.”

The underlying problem, according to Steinbaum, is the cost of higher education and income inequality.

The Trump-Era Department of Education (ED), meanwhile, claimed the IBR program was working well.

“We have recognized that there is an increased reliance on income-based repayment, income-based repayment is there to help borrowers manage their repayment obligation,” said Diane Jones, Senior Deputy Secretary recently. from the United States Department of Education.

However, pointing to some inefficiencies in the program, Jones noted that “it turns out that the department did not confirm income or family size,” so “there were borrowers in the income-based repayment that Maybe they shouldn’t have been there or maybe we’re paying a lower payment than their salary would have otherwise required them to pay. ”

‘Is not refunded and will not be refunded ‘

Another problem with IBR programs is that income-tested payments often don’t keep pace with the exorbitant pace. interest rate on student loans, data from Steinbaum revealed.

Using demographics and economics from the American Community Survey, Steinbaum found that even after a decade of paying off their student loans, the median student loan borrower had only paid off 63% of their loan balance (line violet).

“This means that more than 50% of borrowers with unpaid debt in 2009 had not fully paid off their student loans 10 years later,” said Steinbaum.

The WSJ report found that consultants employed by ED realized that IBR plans were a key source of the estimated $ 435 billion loss that the government would eventually absorb: “Income-based repayment borrowers will repay an average of 51% of their balances, while borrowers in other plans will repay 80%, according to the analysis of the Department of Education. ”

Taking a closer look at postcodes, Steinbaum found a major disparity between races: as more neighborhoods hosting mostly minorities gained access to higher education through student loans, their share of the debt n ‘has stopped increasing.

the racial disparity in the student loan system has already been documented. A September 2019 Report who followed students who started college in 1995-96 found that 20 years later, the median white student had managed to repay 94% of his debt while his black counterpart still had 95% of his debt.

Ultimately, the data indicates that “we already have significant student debt that is not being paid off and will not be,” Steinbaum wrote in his recent report.

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Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected] Follow her on Twitter @aarthiswami.

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