How House Republicans’ Student Loan Repayment Plan Would Disproportionately Harm Low-Income Borrowers

This piece continues our series examining House Republicans’ proposed restructuring of the federal student loan repayment system via the budget reconciliation process. Here, we focus on how the proposed new approach to determining a borrower’s monthly payment amount misses the mark for keeping persistently low-income borrowers out of student loan default. 

As we outlined in our initial piece on House Republicans’ “Repayment Assistance Plan” (RAP) proposal, the plan departs radically from the core design tenets of all previous income-based repayment plans. One stark difference is that it removes the “income protection” that all existing plans have, which is meant to “protect” a certain amount of a borrower’s income so they can stay current on their loan payment while still having enough funds to cover their basic needs.  

RAP scraps this approach and instead bases a borrower’s payment on their gross income, rather than their discretionary income. Unlike all existing income-based plans—which require monthly payments only once a borrower’s income is a certain amount above the federal poverty threshold—RAP would require payments from even those earning far below the poverty level (the current federal poverty level for an individual is $15,650.) This will likely drive many more borrowers into loan default. 

For reference, even the least generous existing income-based plan doesn’t start requiring payments until a borrower’s income is above 100% of the federal poverty level (FPL), and the most generous plan protects income up to 225% of the federal poverty level. The table below outlines the amount of protected income and maximum repayment terms in existing and former income-based plans.  

Removing the “Income Protection” Will Spike Defaults 

While existing income-based plans have known design flaws that policymakers have long sought to address, the monthly payment formula approach has never been chief among them. Policymakers and experts have long debated what this “discretionary income” threshold should be, not whether it should exist at all.  

The “discretionary income” approach acknowledges that those earning beneath a certain threshold simply do not have the funds to make student loan payments without forgoing basic needs. It is unreasonable to expect an individual to choose a student loan payment over a rent payment, car payment, or grocery bill. Expecting borrowers with very low incomes to make this choice increases the risk that they’ll miss payments and eventually default.  

There is no reason—other than to generate sufficient “savings” to pay for tax cuts—to depart from the consensus formula approach that applies a consistent percentage to a borrower’s “discretionary income” to determine their monthly payment. Compared to the RAP approach, it’s better targeted and easier to understand and administer. 

Proponents of the RAP proposal claim that its minimum monthly payment requirement will help borrowers by forcing them to “stay engaged” in the repayment system. They even acknowledge that their proposal to increase monthly payments from $0 to $10 for the lowest-income borrowers does not generate notable savings but is instead driven by the theory that borrowers who must make even a token payment are more likely to stay engaged with the repayment system and are thus less likely to default. 

Borrower disengagement is a real problem within the repayment system—but it is driven in large part by administrative barriers to staying enrolled in IDR. It was such a notable problem that during his first term, President Trump signed into law a bipartisan proposal to address it, the FUTURE Act. This proposal was widely supported by repayment experts of all stripes. 

The FUTURE Act authorizes secure, automated data sharing between the Education Department and the Treasury Department to automate the enrollment process for income-based repayment plans. When fully implemented, this data sharing would eliminate the main “pain point” that leads borrowers to drop out of an income-based plan—the need to annually re-certify their information. 

Unfortunately, these FUTURE Act provisions have yet to be implemented, five-plus years after the bill’s passage. Instead of re-writing the entire monthly payment formula, as RAP proposes, we strongly urge lawmakers to instead address the (very real) problem of borrower disengagement via implementation of FUTURE. It makes little sense to attempt to solve the disengagement problem by throwing out the well-targeted, easily implemented formula approach that works to protect low-income borrowers. 

RAP’s Unintended Payment “Cliffs” 

The RAP proposal takes a never-before-seen approach to calculating a borrower’s monthly income-based payment that replaces the way that all plans to date have calculated monthly payments. In addition to basing a borrower’s payment amount on their adjusted gross income (AGI), it scales the percentage of that income up across arbitrary income thresholds. (All current plans use a single percentage of income for all borrowers, and the “targeting” is achieved via the federal poverty threshold mechanism explained above.) 

Compared to all prior income-based plans, this approach is more regressive—and far more complicated for borrowers to understand and for the federal government to administer. 

Another regressive result of RAP’s approach: a borrower would see a disproportionate spike in their monthly payment whenever they move across the proposal’s arbitrary income thresholds. As a result, small cost-of-living raises designed to cover basic needs could have a net negative effect for some borrowers. Many Americans receive annual cost-of-living salary adjustments meant to ensure their salary does not lose value year over year. Rather than increasing a borrower’s payment predictably and proportionately to their income, the RAP approach could cancel the benefit of a salary increase and even lead to a net loss in discretionary income. 

These (likely unintended) “cliffs” where borrowers would be penalized for even small increases in income when they cross between income ranges are unnecessary, unfair, and uncertain for borrowers. That problem becomes more acute because of the flat-rate “dependent child” deduction of $50 per child per month that would give disproportionate benefit to higher-income borrowers. 

Borrower Examples: Falling Off the RAP “Cliff” 

To demonstrate the above, we modeled how borrowers could be impacted if they received a sample 2.5% raise that bumps them into the next income bracket.i RAP does not allow borrowers to switch into another plan once they enroll, meaning they have no option to re-assess their plan selection if their payments change unexpectedly. 

After just a $1,000 raise, a borrower would see a spike of $444 in their annual student loan payments. In comparison, payments under the SAVE or REPAYE plans would increase by much smaller increments: $50 and $99, respectively. This design approach, which is reflected in all existing income-based plans, still increases a borrower’s payment in tandem with their income but does so in a more consistent and understandable way than RAP. 

Compounding the negative effects of the RAP “cliffs” is the proposal’s attempt to account for the added costs of dependent children. RAP doesn’t adequately protect borrowers, especially those with children, from experiencing disproportionate jumps in monthly payments.  

Consider this example: a borrower who receives a small raise and has a child would pay more than they did with a slightly lower income and no dependents. A 2.5% cost-of-living raise for this borrower would result in an $828 increase in their annual payment amount, which is reduced by $50 a month for one dependent—but is still $228 higher than the required payment at a $70,000 AGI with no dependents. In contrast, the REPAYE and SAVE plans rely on discretionary income, increasing the amount of protected income as family size increases and reducing the required payment. 

What Lawmakers Can Do Instead 

Borrowers need reliable access to income-based payment options, but the untested RAP proposal is the wrong approach. As shown above, its unprecedented approach to calculating a borrower’s monthly income-based payment leads to counter-intuitive and unpredictable payment amounts for borrowers. 

Compared to all prior income-based plans, the RAP approach is more regressive and far more complicated for borrowers to understand and for the federal government to administer. We strongly urge policymakers to reject it and to instead build a better repayment system based on what works for borrowers—starting with years of bipartisan proposals that preserve the basic design elements of income-based repayment plans. 

A better income-based repayment plan should: 

• Ensure monthly payments are truly affordable and scale based on a borrower’s income; 
• Provide real and automatic relief after a reasonable number of payments;  
• Be easy for borrowers to access and understand; 
• Be accessible to all borrowers; and 
• Be as simple as possible for the federal government to administer. 

As always, we stand ready to work with policymakers to design such a plan.