Make Income-Based Repayment Great Again

Assuming it does not simply abolish the Department of Education, the Trump Administration will have to fix the mess left by President Biden’s repeated unlawful (and unsuccessful) attempts to cancel student loans. The biggest challenge may be the fallout from the illegal Saving on a Valuable Education (SAVE) program, which lowers participants’ monthly payments to virtually nothing and then cancelled outstanding loans after 20 years at a cost of a half-trillion dollars to regular taxpayers.

The Eighth Circuit already enjoined SAVE—with the Supreme Court’s blessing—because the 1993 law on which SAVE is purportedly based does not authorize mass cancellation of student loans. Perhaps the Trump Administration will obviate a final ruling on the merits by voluntarily ending SAVE. But it should not simply re-enroll the millions of SAVE participants in predecessors programs—Obama-era repayment plans called PAYE and REPAYE—because those programs are based on the same 1993 law and thus are also illegal. Rather, it should restore the income-based repayment (IBR) program that Congress authorized but remains virtually unused.

To understand why, we return to the 1993 Amendments to the Higher Education Act, which authorized the Department of Education to make direct loans to college students and provided for several repayment plans. The standard plan requires full repayment within 10 years. Another option for lower-income borrowers is the “income-contingent repayment” (ICR) plan, which allowed for “varying annual repayment amounts based on the income of the borrower, paid over an extended period of time prescribed by the Secretary, not to exceed 25 years.” The law said nothing about debt cancellation. It merely provided for lower monthly payments stretched over a longer period. A 30-year mortgage, for instance, has lower monthly payments than a 15-year mortgage. But both plans provide for full repayment of the debt. Similarly, the 25-year income-contingent repayment plan provides for full repayment with lower monthly payments compared to the standard 10-year plan.

The Department’s original ICR plans were consistent with this understanding: monthly payments were lower but not so low that full repayment was not possible within 25 years. Because this was considered insufficiently generous, Congress enacted a new statute in 2007 that created the income-based repayment (IBR) plan—apologies for the confusing terminology. IBR capped monthly payments at 15 percent of disposal income and explicitly cancelled all remaining debt after 25 years of payments. It was more generous than ICR because it allowed for payments to be lower than what would be needed for full repayment within 25 years.

President Obama thought this was still not generous enough and lobbied Congress at his first State of the Union to lower IBR’s payment cap to “only 10 percent of their [disposable] income” and shortening the forgiveness period so “all of their debt will be forgiven after 20 years.” Congress enacted these 10-percent and 20-year proposals in the Health Care and Education Reconciliation Act of 2010, but explicitly restricted the more generous terms to borrowers after 2014.

President Obama circumvented Congress’s explicit limitation by creating PAYE and REPAYE. Both programs adopted the 10 percent payment caps of the amended IBR statute, with loan cancellation at the end of a 20- or 25-year period. But because he wanted to extend those terms to pre-2014 borrowers whom Congress intended to exclude, Obama did not base PAYE and REPAYE on the IBR statute. Instead, he reached back to the 1993 ICR statute, which until that moment was understood not to authorize the 15 percent cap under the 2007 IBR statute let alone the 10 percent cap. According to the Obama Administration, because the 1993 law did not include a specific cap, it authorizes any monthly payment amount—no matter how low—with the remaining unpaid debt forgiven after the repayment term. But because he settled on the 10 percent cap Congress authorized in 2010 under IBR, no one saw a need to challenge PAYE and REPAYE at the time. These ICR programs thus survived and attracted millions of borrowers, while virtually no one used the IBR program that Congress authorized.

Fast forward to the Biden Administration, which promogulated SAVE under the 1993 ICR statute using identical reasoning undergirding PAYE and REPAYE. If the 1993 law had no limits as Obama said, then why stop at the IBR cap Congress authorized in 2010? So, Biden created SAVE, which lowers the cap to result in ten times more debt cancelation than PAYE and REPAYE. His legal reasoning is the same as Obama’s: the 1993 law granted the Secretary of Education unlimited discretion to cancel student loans through the guise of a repayment plan. To be sure, Biden merely abused that discretion more than Obama. But that discretion never existed—Obama invented it to circumvent congressionally enacted limits on IBR.

When SAVE ends—whether by court ruling or voluntarily by the Trump Administration—the Department cannot return to PAYE and REPAYE, as both are based on the 1993 ICR law that does not authorize loan cancellation. Rather, the Trump Administration should restore the barely used IRB plan that Congress authorized. Under the 2010 terms, IBR offer the same low monthly payments and eventual cancellation that PAYE and REPAYE promises. And Congress’s restriction of those terms to only post-2014 borrower is no longer relevant. Millions of borrowers who are enrolled in the illegal SAVE plans can be placed into congressionally enacted IBR plans. Rather than continue PAYE and REPAYE—which have always had a defective authorization—Trump should make IBR great again, as Congress intended.

November 13, 2024