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Report: Reliance On Loan Forgiveness Soaring

Americans’ reliance on loan forgiveness programs to pay off student loans is soaring, according to a major U.S. think tank.

Data from the Department of Education, tracked by the non-partisan New America Foundation (NAF), indicates that the number of Americans participating in one of two alternative loan-repayment plans has more than doubled in the past year, with growth showing no signs of stopping.

Income-Based Repayment (IBR) and Pay As You Earn (PAYE) are the two existing programs available to Americans who have taken out government-backed student loans.

IBR is the older of the two, created for individuals who began taking out student loans prior to 2007, and caps loan payments at 15 percent of an individual’s discretionary income. After 25 years of payments, any remaining student loan balance is forgiven.

PAYE is more generous, with a maximum payment amount of 10 percent of discretionary income and loan forgiveness typically coming after 20 years. Under either program, individuals can slash the forgiveness period to 10 years if they are in in fields that are considered “public service,” such as working for the government.

Over the past year, participation in the programs has risen from 950,000 participants, or about six percent of all student borrowers, to 1.9 million, about 10.5 percent.

The numbers are equally stark when put in terms of total loan amounts. In the 3rd quarter of 2013, 14.4 percent of the Department of Education’s Direct Loan portfolio was involved in IBR or PAYE. Now, that total has risen to 21.8 percent, representing over $1oo billion.

The numbers do not include millions of additional borrowers who are in full default on their student loans and not currently making payments. In recent years, about 15 percent of borrowers have gone into default within three years of leaving school.

The rising numbers of participants in income-based repayment plans, which show no indications of slowing down, reflect rising college tuition rates that are well outpacing the growth in jobs capable of paying off high loan amounts. They also reflect a concerted push by the Obama administration, which has attempted to raise awareness of alternative payment methods in order to ease the burden of loans on younger Americans.

NAF used the data to warn that IBR and PAYE could be turning into a windfall for high earners. Tuition costs, and by extension loan amounts, have risen so high in fields like law and medicine that it is possible for graduates to be earning six-figure incomes and still qualify for loan forgiveness plans.

Such forgiveness could, down the road, cost the government billions of dollars when loan figures potentially exceeding $200,000 begin to be forgiven.

A recent bill, proposed by Florida Republican Sen. Marco Rubio and Virginia Democratic Sen. Mark Warner, would automatically enroll all student borrowers in income-based repayment plans similar to IBR and PAYE, but would seek to discourage students from taking on overly large loan amounts by capping 20-year loan forgiveness at $57,500, with borrowers having to wait an additional decade (for a total of 30 years) to have any remaining loans forgiven.

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