With the recent news about the Obama administration’s proposed expansion of the Pay-As-You-Earn repayment program for certain federal student loan borrowers, people have been talking a lot about income-driven repayment. The problem is that there are a lot of misconceptions about these repayment programs, and this can steer public discourse in the wrong direction. I’d like to try to dispel some of the most common myths I encounter.

• Borrowers pay little or nothing on an income-driven plan. There are several income-driven repayment plans, each with their own eligibility criteria and formulas to calculate monthly payments. Two of the plans, Income-Based Repayment (IBR) and Pay-As-You-Earn (PAYE) have exemptions for people at or below 150% of the federal poverty limit. This makes sense, since if it’s a choice between putting food on the table and paying your student loans, we want you to put food on the table. For everyone else, 15% of discretionary income for IBR and 10% of discretionary income for PAYE is not an insignificant payment amount, particularly given the rising cost of food, fuel, and housing, as well as declining purchasing power. Under IBR, a borrower making $35,000 per year will pay about $230 per month. At $55,000 per year, the borrower will pay about $480 per month.
• Everyone will get their loans forgiven. For all of the income-driven repayment plans, if you make payments for the full repayment term (25 years for IBR, 20 years for PAYE), any remaining balance will be forgiven at the end of the term. However, the fact is that the vast majority of people in these programs will repay their loans before the repayment term ends, and there will be no balance to forgive. Take the following example. A borrower who graduates with $33,000 in federal student loan debt (the average debt load for the Class of 2014) at a 4.8% interest rate, and has a starting salary of $35,000, will repay their loans in full under both the IBR and PAYE plans.
• It’s easy. All you have to do is send in documentation of income every year, and your loan servicer will recalculate your payment. Piece of cake, right? Wrong. The federal student loan servicing system is plagued by administrative errors and inefficiency. Many of you recall that when I tried to re-certify my income to remain in income-driven repayment, I had tremendous difficulties. And I’m the expert when it comes to this stuff!
• Borrowers get a free pass, and taxpayers foot the bill. Most borrowers will repay their student loan debts in full by the end of their income-driven repayment terms, so only a fraction of borrowers on income-driven plans will have any balance forgiven. Furthermore, because of how interest works, the vast majority of borrowers will wind up repaying significantly more than they originally borrowed, including those who get some of their balance forgiven at the end of their repayment term. On top of this, any forgiven balance could be treated as taxable income for the borrower, meaning the borrower would have to pay additional taxes. What all of this means is that under these plans, even with their forgiveness provisions, the government (and the taxpayer) still come out on top. It’s not even close. This is not a free pass for borrowers.
• Students borrow more because of these plans. There is no actual data to back up this assumption. The fact is, with college tuition exploding during the past twenty years, education has simply become much more expensive. Students entering college and taking on student loan debt have very little counseling about their post-graduation repayment options, and most do not even know about income-driven repayment until they graduate. Data shows that these programs are significantly under-utilized, meaning that borrowers who could be eligible for IBR or PAYE are simply not enrolling because they do not know that they exist.