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Benefits of Income-Based Repayment Surprise House Education Committee Members

Earlier this week, the House Workforce and Education Committee met for a hearing on student loan programs, “Keeping College Within Reach: Examining Opportunities to Strengthen Federal Student Loan Programs.” The Committee asked Jason Delisle, Director of the Federal Education Budget Project (FEBP) at the New America Foundation, to testify about his proposal for setting interest rates on federal student loans and his analysis of recent changes to the Income-Based Repayment (IBR) plan that will provide large subsidies to graduate students.


You can read Jason Delisle’s testimony submitted to the committee here, as well as view the full hearing here [time stamp: 17:51-22:20].


While there appeared to be little debate among committee members about Jason Delisle’s interest rate proposal, Committee members – Republicans and Democrats – responded with shock and disbelief about how the new Income-Based Repayment and Pay As You Earn plans for student loans work.


Early in the hearing, Committee Chairman John Kline (R, MN-2) asked Jason Delisle to elaborate on a point in his testimony that IBR can make interest rates irrelevant for borrowers because their payments are based on income, not how much they borrow or the interest rate on the loan:


Chairman Kline: Mr Delisle, your thought was that with the IBR plan you were, in effect, addressing the issue of a cap without actually putting an interest cap in. Is that correct?


Delisle: For example, consider someone with $45,000 in debt from undergraduate and graduate studies, who works in the government or nonprofit sector, and earns a starting salary of $38,000 dollars, with a 4 perent annual raise. At an interest rate of 4.9 percent on the loan, she pays a total of $22,000 on her loan over ten years, and then the remaining balance is forgiven under public service loan forgiveness. At an interest rate of 12 percent, she still pays $22,000 on her loan. If her interest rate is zero, she still pays $22,000 on her loan.


Kline: Thank you. Wow, somehow that doesn’t seem possible.


Similarly, Representative Grijalva (D, AZ-3) expressed confusion and disbelief on the same topic.


Grijalva: I’m still trying to get my head around some concepts that I heard today, that irrespective of the amount of money you borrow or the interest rate that you’ll still end up paying the same amount. I’m going to have to work on that one a little bit.


Fortunately, there is an easy way for lawmakers and their staff to learn more about how IBR works, and they can see its effects for themselves. They can use the New America Foundation IBR Calculator and test any example they want, including those listed in Jason Delisle’s testimony. And on one of those long flights back home they could read the New America Foundation policy paper Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans.Maybe seeing is believing for understanding the recent changes to the Income-Based Repayment plan for student loans and their effects.