Automatic for the Borrower: How Repayment Based on Income Can Reduce Loan Defaults and Manage Risk March 2014 By

Automatic for the Borrower: How Repayment Based on Income Can Reduce Loan Defaults and Manage Risk.

Table of Contents Consortium Description ........................................................................................ 3 Acknowledgments .................................................................................................. 3 Glossary .................................................................................................................. 3 Introduction and Executive Summary .................................................................. 4 Repayment Terms for Auto-IBR ............................................................................ 7 The Principles of a Successful Auto-IBR Formula .......................................................... 7 Applying the Principles to Current IBR Terms ................................................................. 7 Examining Alternative Terms for Auto-IBR ...................................................................... 9 Three Examples of Auto-IBR Plans ................................................................................. 10

Simplifying Repayment through an Employer Withholding Scheme ................ 14 The Current Repayment Process .................................................................................... 14 Challenges of the Current IBR Repayment Process ....................................................... 15 Employer Withholding: A Possible Solution ..................................................................... 16 How Would Employer Withholding Work? ....................................................................... 17

Rethinking Institutional Accountability ............................................................... 20 Possible Unintended Consequences of Auto-IBR ........................................................... 20 Improving Consumer Information and Counseling .......................................................... 21 Loan Limits in Auto-IBR ................................................................................................... 21 Redesigning Federal Accountability Measures under an Auto-IBR System ..................... 23 The Stakes and Application of Accountability in Auto-IBR ................................................ 32

Conclusion .............................................................................................................. 35 Endnotes ................................................................................................................. 36

2

© 2014

Automatic for the Borrower: How Repayment Based on Income Can Reduce Loan Defaults and Manage Risk.

Consortium Description This paper is the culmination of work by a consortium of five student-aid advocacy and research organizations – HCM Strategists, the Institute for Higher Education Policy (IHEP), the National Association of Student Financial Aid Administrators (NASFAA), New America (NA), and Young Invincibles (YI) – with assistance from the Association of Public and Land-grant Universities (APLU), Committee for Economic Development (CED), the National Campus Leadership Council (NCLC), and the National College Access Network (NCAN). The proposals contained in this paper reflect research conducted by and discussions between members of the consortium. However, not all proposals included in this paper are supported by all groups in the consortium. Financial support for this research was provided by a grant from the Bill & Melinda Gates Foundation through the Reimagining Aid Design and Delivery (RADD) project.

Acknowledgments We would like to thank the Bill and Melinda Gates Foundation for their generous support of this important research. A number of higher education experts served as advisors to our consortium, and we would also like to thank th