But as millions of people enroll in these programs, a problem arises: when borrowers’ monthly payments fall below the amount of interest accrued that month, their balances increase rather than decrease. Recent studies have found that 75 percent of borrowers in these programs owe more money five years into repayment than they initially borrowed, and even 12 years after the start of the school year, nearly 40 percent of all student loan borrowers owe more than they initially borrowed. The problem is particularly acute for black borrowers, who have to borrow more to go to school and pay less for financial resources. 20 years later, the median black borrower still owes 95 percent of the amount they borrowed. Stagnant or increasing balances have led to a $1.7 trillion student debt crisis and a sense of desperation or fraud on the part of borrowers.
The new student loan payment plan proposed by the Biden administration acknowledges the problem, but offers only a half-hearted solution. Program changes would cut many borrowers’ monthly payments in half to 5 percent of their income and, as with the existing income-driven program, any remaining loan balance would be eliminated after 20-25 years of repayment (or a more reasonable 10 years) For those who borrow less than $12,000, an additional year of payments for each additional $1,000 borrowed, up to a maximum of $22,000). To address the problem that many people’s monthly payments are lower than the interest the government charges them each month, the government proposes to write off any monthly interest that exceeds the borrower’s repayment.
This change would prevent the borrower’s balance from growing as long as the borrower makes monthly payments. But it would not put borrowers on a track to reduce their balances through repayment. Just like the Emily character, millions of real-life borrowers will continue to make monthly payments without reducing their balances. They’ll still need to put money into this black hole for 20 years – while filling out paperwork and proof of income every year to earn the privilege.
It doesn’t have to be this way. In an unlikely convergence, both student loan servicers and advocates for low-income borrowers have proposed redesigning income-driven repayment plans to provide incremental relief during repayment. Instead of writing off only any unpaid interest each month, as is currently proposed, the government would write off any difference between a borrower’s adjusted income and their payment on a standard repayment plan for the same term. As a result, all borrowers’ loan balances would steadily decrease over the repayment period, with nothing left to cancel at the end of the term.
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Families holding student loan debt could eventually see their balances steadily decline with each payment. Borrowers can pay off their loans faster – allowing them to move on with their lives free from the weight of student loan debt.
This is not a novel idea. Institutions like Harvard Law School offer a Low Income Protection Program for their graduates that operates on the same principles, subsidizing income-based student loan payments to ensure that their graduates can make steady yearly progress in paying off their loans and become debt-ridden. Free after 10 years. Such financial security and grace should not be reserved only for Harvard students. Everyone should have the means to pay off their student debt without relying on the criminal side of the equation.
