The tension between student loan accountability and income-driven repayment plans

How difficult is it for recent college students to repay their share of the $1.3 trillion in outstanding student loan debt? The newly released College Scorecard reports that 37% of federal student loan borrowers were unable to pay back even $1 of their outstanding principal balance after three years in repayment (e.g., any payments they may have made have been applied to accrued interest only).

The intent of this new repayment metric is to measure the percentage of borrowers making progress on their loans. However, multiple policy and advocacy organizations are skeptical that a $1 reduction in principal balance is an indication of repayment success. This criticism has merit given student loan repayment occurs over a long period of time and $1 is miniscule compared to the full amount most borrowers must repay.

But in the background of this dialogue on repayment rates is a separate public policy initiative in support of federal income-driven repayment (IDR) plans. These plans offer lower monthly payments to make student loan debt more manageable for borrowers and can prevent negative outcomes like default. As a result, minimum payments may not be large enough to reduce principal balance. It follows, that increasing the number of students in IDR plans could lead to lower repayment rates, putting the accountability metric and debt-relief tools in discord with one another.

To explore the relationship between the two, we analyzed a nationally representative sample of bachelor’s degree recipients from 2007–08 and found that the median time to repaying $1 in principal balance was 4-6 months after entering repayment. While this accounts for only a segment of the overall borrowing population, the result is contrary to stereotypes of a distressed population of borrowers unable to make minimum payments after completing college. On the other hand, after controlling for a range of individual-level characteristics, we found a significant penalty associated with enrolling in an IDR plan. Borrowers in our sample that enrolled in IDR took much longer to repay $1 of principal balance, and often never met this minimal threshold over the time we observed their repayment.

Our sample comes from the National Center for Education Statistics’ 2008–2012 Baccalaureate and Beyond Longitudinal Study (B&B:08/12). We studied their student loan repayment over time by transforming administrative data from the National Student Loan Data System (NSLDS) to create a history of individuals’ federal loan activity, beginning with the month a student entered repayment. Using event history analysis, we examined how long it took borrowers to meet the College Scorecard’s metric. The figure below plots the proportion of borrowers that have yet to pay back $1 of principal balance over time in repayment. The solid curve shows that after 4-6 months, only 50% of borrowers not enrolled in IDR plans had yet to do so. The dashed curve above it depicts an entirely different story. The lower monthly payments of borrowers enrolled in IDR plans were often not enough to decrease their principal balance, and the median time to repay $1 principal for these borrowers was longer than 5 years – the maximum amount of time we could observe in our dataset.

Our findings underscore a major challenge of policymaking around the student loan issue. In the aggregate, our results support claims that repaying $1 of principal balance is a weak benchmark for bachelor’s degree recipients and it may not be a useful measure of progress. However, the goal to create a useful repayment rate for institutions poses challenges in the context of policies, like IDR plans, designed to help individual borrowers. IDR plans lessen the burden of student loans and help prevent default, but by nature they lengthen time to repayment and decrease the probability of reducing principal balance in a timely manner. This means institutions with more students enrolled in IDR plans could see adverse effects on their institution-level repayment rates. These conclusions require further exploration, particularly with non-bachelor’s degree recipients and students who drop out of school; yet, these analyses should inform further research and policy discussion of repayment rates.

The dialogue surrounding student loan repayment is a welcomed shift from cohort default rates, which have long been criticized for being easy to manipulate. However, our worry is these new repayment rates could discourage institutions from promoting IDR plans and other options designed to aid students experiencing financial insecurity. As repayment rates continue to appear in other education accountability venues (see here; and here) our hope is that policymakers consider their relationship to other tools, like IDR, aimed to help individual borrowers when refining these metrics.

The authors are analysts in the Education and Workforce Development division at RTI International where their research focuses on postsecondary education policy and federal financial aid.