Jobs for the Future (JFF) welcomes the Biden administration’s proposal to make federal student loan payments more affordable by significantly reforming the income-driven repayment (IDR) program.

The White House’s plan would make the U.S. IDR program more generous than similar programs in the United Kingdom and Australia, though the additional cost to government is significant. In addition, the Biden plan would move the U.S. IDR program into greater alignment with innovative income-contingent approaches emerging in the private sector, including income share agreements (ISA).

Education Financing in the United States

Learners in the United States have relied heavily on debt to finance postsecondary education. According to the Education Data Initiative, 20% of all American adults carried undergraduate education debt in 2022 and 7% carried graduate school loan debt. Most of this debt is in the form of traditionally structured loans that obligate a borrower to repay a principal plus interest with fixed monthly payments. The interest level depends on the type of loan—for example, the interest for federal unsubsidized loans (currently 4.99%) equals the yield of 10-year Treasury bonds plus 2.05 percentage points.

Over time, the federal government has created multiple income-contingent repayment plans: the Pay As You Earn Repayment Plan (PAYE), the Income-Based Repayment Plan (IBR), the Revised Pay As You Earn Repayment Plan (REPAYE), and the Income-Contingent Repayment Plan (ICR). Each of these options includes these key elements:

1. Borrowers whose earnings fall below a certain threshold (usually 150% of the federal poverty line, which in 2022 equates to $20,385 for individuals) don’t need to make monthly payments.
2. Monthly payments are capped at a certain percentage of a borrower’s discretionary income (between 10% and 20%) above the earnings threshold.
3. The outstanding balance will be canceled after 20 years (or 25 years for graduate school debt), regardless of how much has been repaid over the life of the loan.

These features are intended to ensure that a borrower’s monthly loan payment is set at an affordable amount based on income and family size.

The Biden administration’s proposed rule changes would phase out all plans except REPAYE and revise the existing REPAYE plan in the following ways:

• Reduce monthly loan payments from 10% to 5% of discretionary income for undergraduate loans.
• Increase the share of income exempt from student loan repayment from 150% to 225% of the federal poverty line ($30,577 in 2022).
• Forgive loans in full after 10 years if the original principal was $12,000 or less, with time to forgiveness increasing by one year for each $1,000 borrowed above $12,000.
• Forgive all federal undergraduate loans after 20 years and all federal graduate school loans after 25 years.
• Eliminate interest capitalization, meaning that loan balances won’t grow if borrowers’ payments fail to cover the interest charge.
• Automatically enroll borrowers into REPAYE if they are 75 days late on payments.

The Biden administration believes these changes would improve the affordability of higher education, particularly for learners and workers from communities that have been underserved by public and private systems and institutions. These changes will also make the program significantly more generous: The administration estimates that for each $10,000 borrowed, undergraduate borrowers would repay $6,121, down from $11,844 under the current system. An Urban Institute analysis found that the share of borrowers with typical debt levels who repay their loans in full would fall from 59% to 22% for borrowers with undergraduate debt and from 62% to 11% for people with debt related to a certificate or associate’s degree program.

Education Financing in Australia and the United Kingdom

Australia ended its no-tuition approach to postsecondary education in 1989 in order to generate revenues so that it could expand student enrollment. Until then, enrollment at Australian universities had been dominated by students from privileged backgrounds. But to ensure that students from low-income backgrounds could afford to go to college, Australia established an income-driven loan repayment program, now known as the Higher Education Loan Program (HELP). (See Table 1 below for more details about Australia’s loan repayment program, as well as those of the United Kingdom and the United States.)

The cost of the program started to grow in 2009 when Australia lifted enrollment caps to make it possible for more students to attend college, and in 2017 the country made a number of changes to the HELP program to increase student repayments. The changes included lowering the earnings threshold from AU$55,874 to AU$45,000 and shifting more borrowers into higher repayment rates over time by slowing the indexation of the brackets.

The U.K. introduced IDR in 1998 for the same reason as Australia: The country wanted to expand postsecondary education to more students, so it coupled a tuition and fees regime with an income-contingent financing system. In 2022, the U.K. lowered the earnings threshold from what would have been £28,551 to £25,000 and removed the inflation index. It also lengthened the period after which loans are forgiven from 30 years to 40, and reduced the interest rate from inflation plus 3 percentage points to just inflation—and temporarily capped it at 7.3% due to high interest rates. As with the Australian program, these recent changes reduced the generosity of the U.K. program.

Differences Between Approaches

Monthly payments. The current U.S. cap of 10% (per the 2014 REPAYE plan) is relatively consistent with the U.K.’s 9% repayment rate (for undergraduate debt). It’s also consistent with Australia’s variable cap: An Australian borrower earning that country’s median wage for college graduates (AU$72,800) would face a 4.5% repayment rate, but this is applied to the borrower’s full income, not just discretionary income, resulting in a larger monthly payment. The Biden proposal to reduce the U.S. payment cap to 5% would make monthly payments for U.S. borrowers more affordable than the payments borrowers would make in the U.K. and Australian programs.

Forgiveness. Under the administration’s proposed changes, loans would be forgiven after 10 years for low-balance undergraduate borrowers, after 20 years for other undergraduate borrowers, and after 25 years for graduate school borrowers. This is more generous than the U.K. program, which recently lengthened its forgiveness period from 30 to 40 years, as well as the Australian program, which doesn’t offer any time-based forgiveness.

Interest rate. The proposed U.S. loan program offers more generous interest rates than the programs in the other two countries. The interest rate on U.S. loans is currently 4.99% for U.S. federal direct undergraduate loans, which is lower than the UK’s rates of 6.3% to 7.3% (depending on the year and the type of loan). Australia adjusts loan balances each year based on current inflation levels (effectively a variable interest rate), and with inflation at just under 8% in Australia, the resulting interest rate is significantly higher than the U.S. interest rate. It should be noted, however, that both the United States and the U.K. have temporarily instituted a zero percent interest rate due to the COVID-19 emergency.

Growing balances. In both the U.K. and Australian programs, loan balances may grow over time if borrowers don’t pay the interest. The current U.S. program also often results in balance increases due to unpaid interest (more than half of U.S. student loans have a current balance that exceeds the original balance, including three-quarters of the loans held by Black borrowers), however the Biden reforms would prevent unpaid interest from being added to loan balances.

Administration. U.S. borrowers must manually enroll in an IDR plan and manually submit their payments each month, interfacing with one of a handful of private servicing companies rather than a single government entity. This creates significant administrative burdens for borrowers—and ample opportunity for mistakes, for which the system is often unforgiving. In contrast, the U.K. and Australian programs collect student loan payments through employer withholding and tax systems, creating a much easier and more automatic process for borrowers. The Biden proposal would automatically enroll borrowers in REPAYE if they are delinquent for 75 days. Even with this change, the U.S. program will continue to put more administrative burden on borrowers than the U.K. and Australian programs.

Generosity. Under the Australian program, just under 80% of outstanding debt is projected to be fully repaid, with the unpaid amounts largely attributable to borrowers who either had low lifetime earnings or left the country. Similarly, under the U.K.’s new repayment program, it’s estimated that 55% of new borrowers currently repay their loans in full, and that figure is projected to rise to 70% over time. Notably, prior to the recent changes to the U.K. system, only 20% of full-time students were projected to repay their loans in full.

The level of generosity of the current U.S. REPAYE plan appears to be similar to that of the U.K. and Australian programs, with many borrowers repaying at least as much as they borrowed. However, Biden’s proposed changes would result in the vast majority of borrowers receiving at least some loan forgiveness, making the U.S. program far more generous than the other countries’ programs, and closer to the old version of the U.K. system than the current one.

Income Contingency: Biden’s proposal would also move the U.S. loan system away from the traditional loan model, where borrowers are expected to repay the amount they borrowed plus interest, and toward an income-contingent or income share agreement (ISA) approach, in which borrowers pay a certain portion of their income over a set period of time. While the U.K. and Australian programs have long been held up as examples of implementations of the income contingency approach, they’re now more rooted in the traditional loan model than the U.S. program is: Both the U.K. and Australian systems allow balances to rise due to interest capitalization, and Australia doesn’t forgive debt after a set period of time.

A Fairer, More Efficient Approach to Education Financing

The Biden administration’s proposal represents a welcome opportunity to improve the federal government’s approach to postsecondary financing.

It’s true that, even if the proposed changes go into effect, the United States would still lag far behind the other two countries in terms of administration of postsecondary financing, because of our inefficient and burdensome approach to enrollment and repayment. However, in other respects, the changes would bring improvements by making the U.S. program more affordable and more generous than either the U.K. or Australian programs. This is notable because the U.K. and Australia are also experiencing rising student loan burdens, though the burdens on borrowers in those countries aren’t as heavy as they are for U.S. borrowers because tuition costs in those countries are lower (partly due to government controls on tuition levels).

Another welcome feature of the Biden proposal is the proposed shift toward a more income-contingent or ISA style repayment approach. Traditional loans with standard fixed payments are poorly suited to financing education because they can create financial hardship for borrowers with low lifetime earnings and people who are just starting their careers. Moreover, outstanding loan balances not only impose financial burdens on borrowers; they can also create psychological distress. Compared with traditional loans, we believe the proposed income-contingent approach offers a more efficient model for financing postsecondary education—and one that’s certainly fairer for students.