Well-Off Will Benefit Most From Change to Student Debt Relief Plan, Study Says

With nearly one in six student loan borrowers in default, the federal government is making changes to its repayment plan to help troubled borrowers keep up with their payments.

But a report says the changes ultimately will provide only marginal help for low-income borrowers who are at the greatest risk of default.

The New Rule

Under current rules, borrowers pay 15 percent of their discretionary income, based on a formula that is meant to exclude money spent on basic life necessities. The remaining balance and accrued interest is forgiven after 25 years of payments.

The Obama administration is tweaking the program to make it easier for some borrowers, by expediting changes that will reduce monthly payments from 15 percent of discretionary income to 10 percent and forgive outstanding balances after 20 years of payments, instead of 25 years.

Benifiting mostly Well-off

The report that will be released on Tuesday by the New America Foundation, a nonprofit and nonpartisan policy institute, says the changes to income-based repayment could provide some benefits to all participants. But the primary beneficiaries would be high-income, high-debt participants who could make relatively small payments for 20 years and then have a large part of their debt forgiven, the authors said.

The foundation cites as an example advice given by financial planners such as the Advantage Group in California.

“Stop wasting your money on student loan payments,” says the Advantage Group Web site. The firm notes that an average graduate from California Western School of Law owes more than $145,000 in student loans, amounting to monthly payments of more than $1,690.

But the changes introduced by the Obama administration could allow a graduate making $70,000 a year to reduce monthly payments to $448 a month and “have over $100,000 of debt forgiven,” the Advantage Group says.

Terry DeMuth, chairman of the Advantage Group, said the firm was simply trying to help its clients benefit from the program.

The New America Foundation report recommends that the administration make changes that would focus the benefits of income-based repayment on lower-income borrowers and limit those for borrowers earning big incomes.

“If you are low-income, it doesn’t really give you a big bang,” said Jason Delisle, one of the authors of the study, which estimates that monthly payments for low-income borrowers would drop to $20, from $25, under the changes. “If you are high-income and have a lot of debt, this is a huge giveaway.”

Asked about the report, Justin Hamilton, a spokesman for the Education Department, said in a statement that income-based repayment “isn’t necessarily right for everyone, but it can be an incredibly helpful resource for people struggling to manage their student loan debt.”