Lawyers, MBAs and other high-income professionals will get a bigger break on student loans than low-wage earners under the government's new income-based repayment program, according to a new study released Tuesday.
The repayment program was originally established to help students manage debt by limiting payments to a certain percentage of income and placing a cap on how long borrowers can take to pay. In 2010 President Obama asked Congress to alter the program by lowering of the percentage of income for repayment to 10 percent from the current 15 percent, and putting a cap on the paydown period at 20 years, rather than 25 years, for loans originating in July 2014 or after.
That may sound like good news for borrowers, but it turns out to be much better deal for kids who already have a leg up in the work force, according to a new report from the New America Foundation, a nonpartisan policy think tank. Instead, the report found that the program "is set to provide huge financial windfalls to people who, far from being in need, are among the most financially well-off graduates in today’s job market."
How much of a windfall? It could mean a law school borrower writing off as much as $160,000 of debt, the report said.
Under the current program, a law school graduate who has around $122,000 in federal loans and a starting salary of $65,000 that grows to $200,000 in 20 years will be able to write off about $23,000 of his or her debt at the end of the pay-down period. With the new program, the borrower will repay only about half as much, and the government will forgive more than $160,000 of the outstanding debt, the Chronicle of Higher Education reported.
The one-size-fits-all policy will also lower loan payments by borrowers making less than $25,000 in annual salary between $5 and $20 per month, according to the report.
But it's middle-class kids who could get the shortest end of the stick under the new program. According to the report, middle-income earners who start with salaries under $33,000 and later earn $63,000 or more for the majority of their repayment period, "will actually pay more and for longer due to the pending changes."
“The design of the plan has the potential to misdirect some of the subsidies towards people who will be earning fairly substantial incomes,” Mark Kantrowitz, founder of finaid.org, a website about college finances, told the New York Times. “The improvements don’t benefit the low-income students as much as the high-income students.”
The Obama administration, along with the Consumer Financial Protection Bureau, want to get more people into the income-based repayment program, but so far less than 3 precent of borrowers actually use the program, according to Bloomberg. One reason the program has not been better utilized is that it has not been promoted by lenders who will lose income if borrowers make smaller payments. The application process is also overly complicated, according to Time.
However, following a report on student loans released on Tuesday, the CFPB is recommending more incentives to help more students get into income-based repayment programs.
But the real loser here could actually be the government. Citing lower salaries and an extremely tough job market, a story in American Lawyer suggested that "the likelihood that the government will be forced to cancel large amounts of law school debt in 20-25 years is high."