Repayment Plans Benefit Low-Income Student Loan Borrowers

on June 20, 2017

Income-driven repayment plans provide a greater benefit to low-income households that are repaying student loan debt than refinancing student loans at a lower interest rate, according to a report released by New America.

 

The report, In the Interest Of Few: The Regressive Benefits of Federal Student Loan Refinancing, states that income-driven repayment plans are a better option for helping low-income borrowers pay off student loan debt. For instance, a borrower with an annual income of $8,000 saves $50 a month through an income-driven repayment plan. That same borrower wouldn’t save any money if they were to refinance their student loan.

 

“Borrowers … who enroll in an (income-driven repayment) plan would not benefit from refinancing in all cases — because monthly payments in (income-driven repayment) plans are based on income, and an interest rate reduction would not affect the monthly payments for these borrowers.”

 

In fact, it’s top earners — people who fall in the top 40 percent of the annual income bracket — who reap the largest benefit from refinancing. Only about 15 percent of households would benefit more from refinancing over an income-driven repayment plan.

 

Borrowers in the top 20 percent of household income would save approximately $10 each month through refinancing, while borrowers in the bottom 20 percent would save only about $6 per month. Although the monthly difference in savings is small, the cumulative savings can amount to hundreds of dollars over the life of the loans.

 

Top earners also are likely to have higher levels of education and higher incomes, thus they benefit the most from refinancing policies.

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