Economics Review: Catherine, Sylvain and Ebrahimian, Mehran and Yannelis, Constantine, How Do Income-Driven Repayment Plans Benefit Student Debt Borrowers? (October 07, 2024).

Available at:    https://ssrn.com/abstract=4980610

Abstract:

The rapid rise in student loan balances has raised concerns among economists and policymakers. Using administrative credit bureau data, we find that nearly half of the increase in balances from 2000 to 2020 is due to deferred payments, largely driven by the expansion of income-driven repayment (IDR) plans, which link payments to income. These plans help borrowers by smoothing consumption, insuring against labor income risk, and reducing the present value of future payments.  We build a life-cycle model to quantify the welfare gains from this payment deferment and the channels through which borrower welfare increases. New, more generous IDR rules increase these transfers from taxpayers to borrowers without yielding net welfare gains. By lowering the average marginal cost of undergraduate debt to less than 50 cents per dollar, these rules may also incentivize excessive borrowing. We demonstrate that an optimally calibrated IDR plan can achieve similar welfare gains for borrowers at a much lower cost to taxpayers, and without encouraging additional borrowing, primarily through maturity extension. 

Commentary:

Particularly to the extent that unpaid balances,  in the mass aggregate,  are used by the Congressional Budget Office  (CBO)  for not only "scoring"  the costs of  any student loan relief,  whether bankruptcy discharge or otherwise,  and also by opponents to relief to waive an red flag about how massive the amount of student  loan debt there is (with the imputation of equally massive borrower  irresponsibility,  data  showing that half of the increase in these balances is due to deferred payments  is a helpful counter.  

This is especially true when coupled with other findings that  "deferred payments"  were often the result of improper  student loan servicing,  as servicers often found it more profitable to grant extended and repeated forbearances rather than enrolling borrowers in appropriate Income Driven Repayment plans.

It does appear that the Department of Education,  in its most recently promulgated rules regarding nonbankruptcy hardship relief,  has attempted to recognize something of this same thing in gauging the financial impact of that relief.

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