Aug. 4, 2014
Many in the policy-making community and the media frequently say that enrollment in Income-Based Repayment (IBR) and the Pay As You Earn (PAYE) repayment plans for student loans is low, has lagged, or has failed to reach some putative optimal level. Our analysis of the latest enrollment figures from the U.S. Department of Education -- released today -- suggest those are inapt descriptions, although it's hard to gauge what the level and pace of enrollment in these programs ought to be.
By way of background, IBR and PAYE allow borrowers to make payments on their loans as a share of their incomes and qualify for loan forgiveness after 10, 20 or 25 years of payments, depending on their circumstances. The enrollment information that the Department released today allows us for the first time to see statistics covering a full year. (Note, these figures only reflect the Direct Loan portfolio; no similar information is available on the loans issued in the defunct Federal Family Education Loan Program.)
First, enrollment in IBR and PAYE programs continues to grow and the programs now account for 10.5 percent of borrowers in repayment. That's up from 6 percent a year ago. By loan balance, the programs account for a whopping 21.8 percent of the Direct Loan portfolio in repayment. Year over year, the number of borrowers enrolled has more than doubled. The amount of debt being repaid through the programs is up nearly as much (93.5 percent). The rate of growth appears to be fairly constant as well, so the next set of numbers that the Department releases in three months should show further gains.
About two years ago Alex Holt and I pointed out that the benefits these plans provide in the form of reduced payments and loan forgiveness, particularly PAYE, were larger than what many people understood. We showed that under PAYE, even middle and upper-income borrowers could qualify for substantial loan forgiveness.
"But take-up in these programs is low and hardly anyone uses them," was the response we heard most often, so our conclusions must have been overblown. Of course, the problem with that thinking is that it assumes a static state of the world. That borrowers would eventually enroll in greater numbers was our point, which is exactly what the latest figures show.