Many believe the United States is in the midst of a student debt crisis. With outstanding federal student loans at $1.6 trillion, mass loan forgiveness proposals have garnered public attention and support from prominent politicians. But there’s a glaring omission in the debate about unaffordable student debt: the existing Income-Driven Repayment (IDR) program. Though far from perfect, this program goes a long way towards solving any student loan crisis among distressed borrowers — and it provides loan forgiveness. Do we really need a debt jubilee, too? Hardly. But as we show in a new American Enterprise Institute report, that doesn’t mean we should do nothing.
First, let’s consider how IDR helps ensure borrowers aren’t overwhelmed by their student loans. Most people with federal student loans have access to the program and therefore can elect to cap their monthly payments at 10% of discretionary income. This significantly reduces payments even for borrowers with average amounts of debt. A single adult earning $35,000 per year would normally pay $304 a month on a $30,000 loan on the standard repayment plan. But enrolling in IDR lowers her monthly payments to just $131. These lower payments will put her at much lower risk of default or other financial distress.
The Department of Education estimates that the average monthly payment for borrowers using IDR is around $154. But that statistic masks another feature of the program. Since payments are based on discretionary income, not total income, many borrowers qualify for monthly payments of zero.
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