How a new student loan model could upend higher ed funding

Program shifts costs to federal government

Students continue to struggle with debt, but as income-based payment plans go mainstream, higher education's funding model is poised to radically shift, argues Kevin Carey in a post for the New York Times' "The Upshot" blog.

Background on income-based repayment

Under the federal government's Income-Based Repayment (IBR) student loan program, borrowers currently pay a maximum of 10% of their monthly income in debt service, and any remaining balance is forgiven after 20 years. Although a version of the program has existed since the 1990s, it has recently gained attention from students and higher education industry leaders for its ability to help borrowers.

In the third quarter of 2013, only 6% of borrowers were enrolled in IBR, and the total value of their loans represented 14.4% of outstanding debt. But by the end of 2014, those figures had nearly doubled, with 11.8% of borrowers enrolled in IBR, representing almost 25% of the value of loans issued by the Department of Education. As time passes, those numbers are likely to grow even more.

A radical shift

As states have scaled back their support for higher education, the funding burden has increasingly shifted to tuition, which most students finance through federal loans.

When those loans are forgiven after 20 years, the federal government often ends up paying a large portion of the overall loan. Carey runs some representative numbers in a thought experiment and finds that it's possible for a borrower to pay less than half of what the government eventually ends up paying.

In that model, the burden of financing colleges moves from states, to tuition, to the federal government.

Related: Public education is not so public anymore, says GAO

"The signs point toward the federal government replacing states as the primary financier of American higher education," writes Carey.

Nobody will have to default

As Carey notes, this "change in college financing has a potentially serious drawback when it comes to college pricing." In this scenario, public colleges and universities may be less likely to keep tuition low because students can afford to pay more using federal loans. Undergraduate borrowing is capped at $31,000, but there is no limit for graduate education.

Even so, the emerging system carries a benefit for students: "nobody will ever default simply because they can’t afford to pay," argues Carey (Carey, "The Upshot," New York Times, 1/24).

The takeaway: Income-based student loan repayment programs are alleviating student debt, but also shifting the burden of college cost to the federal government.

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