Income-Driven Repayment Plans for Student Loans

Coauthors: Jeffrey Perry and Nadia Karamcheva

This paper presents new facts about income-driven student loan repayment plans using administrative data. Income-driven repayment plans link student loan payments to borrower incomes. These plans were almost non-existent prior to 2008, and by 2017 account for 29% of federal student loan borrowers and 49% of balances in repayment. First, we show that income- driven repayment plans are heavily adversely selected with borrowers with high balances and low earnings selecting into income-driven repayment plans. Second increased take-up of income- driven repayment and the negative amortization in those plans explain much of the decline in student loan repayment rates between 2008 and 2017. Third, we show that the typical borrower in income-driven repayment is negatively amortizing and we project substantial forgiveness for low-income borrowers.