Income-based Repayment Research Articles

From Debt to Dollars: Assessing a General Surgeon's Career Value

IntroductionSurgical residents make decisions that may have a dramatic impact on career earnings based off conceptions regarding future income potential. This study examines the effect of debt burden, repayment plan, and practice setting on a general surgeon's career value. MethodsDebt levels, repayment plans, and practice setting were considered to model a surgeon's career value using net present value (NPV) across 35 scenarios. The NPV was calculated using salary, education debt, yearly spending, and a discount rate of 5%. Salary data were obtained from the Medical Group Management Association, student debt information from the Association of American Medical Colleges, and tax and household spending data from U.S. government records. Assumptions included no gaps in training, no prior debt, single-person household, and career duration of 35 y. ResultsA general surgeon's salary adequately repays debt burdens from $100,000-$300,000 over 10-25 y, regardless of repayment plan or practice setting. Practice setting decreased career value for academic surgeons when debt burden and repayment plan were held constant: the NPV for an academic surgeon was $382,000 compared to $500,000 for a nonacademic surgeon with the same debt and repayment plan. Debt burden repaid through unsubsidized and income-based repayment plans reduced NPV for all surgeons, while subsidized plans increased NPV. The projected NPV for all scenarios ranged $2.35M-$2.87 M. ConclusionsThough the modeled scenarios do not account for prior debt burden, major expenditures, or increases in yearly household spending beyond national averages, surgery residents should be aware that general surgery remains a financially feasible career.

Perception of Debt During Resident Education-A Systematic Review.

Debt is a common issue among medical residents in the United States. This review attempts 1) to evaluate the level of debt among residents, 2) to assess perceptions toward debt among residents, 3) to determine debt-management options pursued, and 4) to gauge whether levels of debt affect resident career choices. A systematic literature search of articles published between January 2012 and January 2022 in the MEDLINE, EMBASE, and Cochrane databases was performed. The combination of search terms of (financial literacy OR debt) AND (residency OR graduate medical education) were utilized. Primary outcome measures assessed were the levels of debt and perceptions toward the debt. Secondary outcome measures were debt-management options pursued and whether debt affected career choices for residents. Twenty-one studies evaluating a total of 15,585 residents were included in this systematic review. Levels of debt greater than $200,000 were not uncommon across residents and debt burdens are increasing. Greater levels of debt are associated with increased stress and anxiety. Residents reported multiple debt-management options pursued, including loan forbearance, moonlighting, income-based repayment models, military financial support, and loan forgiveness programs. Those with increased levels of debt were less likely to pursue subspecialty training and academic employment positions. The findings conclude that residents carry a substantial amount of debt, and it is a common source of stress and anxiety. Although there are many different avenues that are pursued for debt repayment, levels of debt appear to affect decisions to pursue subspecialty training and to pursue academic positions. Strategies or programs aimed at reducing the debt burden felt by residents could be of great value.

The relationship between debt aversion and college enrollment by gender, race, and ethnicity: a propensity scoring approach

ABSTRACT Borrowing has become increasingly central to U.S. students’ college financing choices. However, concerns about indebtedness may serve as a barrier to attaining a college degree for many students, particularly women and Black and Hispanic students. This study explores the determinants and heterogeneous impacts of debt aversion, or aversion to borrowing for college. I use a propensity score matching strategy to estimate the relationship between debt aversion and the college enrolment and financing choices of high school students while controlling for confounding variables such as students’ pecuniary valuation of college, college preparedness, and family background. More debt-averse students borrow less than other students if they enroll in college and generally attend lower cost colleges. Women and Black students are more likely on average to report moderate debt aversion than other students. Strong debt aversion is associated with lower college enrollment only for men and white, non-Hispanic students, and highly debt-averse women tend to report lower borrowing relative to the control group than similarly situated men. The results point to the need for a combination of robust college counseling in high schools and readily accessible income-based repayment programs.

Parental Support, Savings, and Student Loan Repayment

Using unique survey and administrative data from Canada, we document that parental support and personal savings substantially reduce student loan repayment problems. Developing a model of student borrowing and repayment, we show that nonmonetary costs of applying for income-based repayment assistance are critical to understanding our findings. Furthermore, we show that eliminating these costs may be inefficient. Empirically, we show that expanding Canada’s Repayment Assistance Plan to automatically cover all borrowers could reduce program revenue by half over early repayment years. Finally, we show how student loan programs can be more efficiently designed. (JEL G51, I22, I23, I28)

Job Search under Debt: Aggregate Implications of Student Loans

A dynamic equilibrium model of schooling, borrowing, and job search is developed to quantify the aggregate implications of student loans. In my model, risk-averse agents under debt tend to search less and end up with lower-paid jobs. Calibrating the model using micro data, I show that student loans have significant effects on borrowers’ job search decisions under the fixed repayment plan. The income-based repayment plan (IBR) largely alleviates the burden of debt repayment by insuring labor market outcomes, allowing borrowers to conduct a more adequate job search. In general equilibrium, IBR also increases social welfare by encouraging college attendance.

Student debt, income-based repayment, and self-employment: evidence from NLSY 1997 and NFCS 2015

ABSTRACT Based on the income-risk hypothesis, we test whether those with higher student debt are less likely to be self-employed. We also test if the income-based repayment programme increases the odds of self-employment. Using a longitudinal sample of 6,762 participants (1998–2011) in National Longitudinal Survey of Youth 1997 (NLSY97) and propensity score matching, we find that having student debt decreases the odds of self-employment by 1.3 percentage points. Further, using eligibility for income-based repayment programme as an instrument driving effect of loans in NLSY97 sample or use of income-based repayment plans in National Financial Capability Study 2015 increases the odds of self-employment of about 2 percent. The effect sizes are smaller than previous studies on student loans on labour market outcomes.

The Influence of Medical Education Debt and Risk-Aversiveness on Radiology’s Workforce

By now, most readers are aware of the staggering statistics regarding medical education debt in the United States. The Association of American Medical College reports that the average education debt for medical school graduates in 2018 was $196,520, with up to 16% of all graduates owing greater than $300,000 after completing school [1]. These numbers, in combination with increasing prevalence of income-based repayment programs that appear to be increasing the monthly payment for graduates at annual interest rates greater than 6%, underscore the contemporary saying that many medical school graduates “have a mortgage without a house.” If you add compounding interest onto these large principals during the increasing length of postgraduate education programs, indeed, a crisis is at hand.

The Obama Administration's New 'Repaye' Plan for Student Loan Borrowers: Not Much Help for Law School Graduates

In response to President Obama’s 2014 directive the DOE has proposed a new student loan repayment option, labeled the Repay As You Earn Plan (“REPAYE Plan”). The DOE on July 9, 2015 requested comments on their proposed REPAYE Plan rules, and the Plan will probably be open for enrollment in early 2016 for up to 6 million student loan borrowers who are not eligible for enrollment in the generous Pay As You Earn Plan (“PAYE Plan”) because of their pre-October 1, 2007 federal student loan debts. I estimate that approximately 72,000 of those 6 million persons are law graduates. However, I also estimate that approximately 62% of those 72,000 law graduates have already enrolled in either the Income-Based Repayment Plan (“IBR Plan”) or the Income-Contingent Repayment Plan (“ICR Plan”). Most of those persons among the remaining group of about 27,500 PAYE Plan-ineligible law graduates who have not already enrolled in a loan repayment Plan, if they later do decide to enroll, will enroll in the old IBR Plan rather than the new REPAYE Plan because of the REPAYE Plan’s harsh spousal income inclusion rules.The largest group of REPAYE Plan law graduate enrollees in 2016 will be those old IBR or ICR Plan enrollees who expect to have relatively modest spousal incomes over the coming two decades, and who consequently will in many instances be able to reduce their monthly repayment obligations by switching over to the REPAYE Plan. For the REPAYE Plan to be made more broadly attractive to other law graduates, especially to those more recent law graduates eligible for PAYE Plan enrollment, the required repayment period for law graduates would have to be reduced to 20 years and the spousal income inclusion rules eliminated. Such an amendment to the REPAYE Plan rules could be made by the Department of Education under existing statutory authority and would not require additional Congressional authorization. But this is unlikely because of the politically controversial lost governmental revenue implications, and because of opposition from those persons within the DOE and elsewhere who regard the existing PAYE Plan’s terms as too generous to high-debt graduate school borrowers, and who would not want to see those terms made available to a broader group of law graduate borrowers.

Should We Defuse the 'Tax Bomb' Facing Lawyers Who are Enrolled in Income-Based Student Loan Repayment Plans?

Starting in 2033 first thousands and then later tens of thousands of mid-career lawyers who have previously incurred large student loan debts, and who unfortunately have been able to earn only relatively modest annual incomes in the 20 or 25 years following their law school graduation, will be subject each year to large cancellation of indebtedness-based federal and sometimes also state income tax obligations. These obligations will result because a large portion of the substantial student loan debts that have been incurred by many law school graduates will eventually be forgiven under one or another variant of the increasingly popular federal Income-Based Repayment Plan (“IBR Plan”) in which those persons have enrolled after their graduation, and those forgiven debts will then be treated under the Internal Revenue Code as taxable income. These tax bills will often be in the neighborhood of $50,000 to $100,000 or even larger for those lawyers that have enrolled in the recently implemented Pay As You Earn Plan (“PAYE Plan”) version of the IBR Plan, and in the neighborhood of $15,000 to $25,000 for those lawyers who have enrolled in the earlier-established “old IBR” version of the IBR Plan. Many of these lawyers will have failed to adequately provide for this large tax obligation and will find that it will impair or even devastate their retirement plans.The phrase “tax bomb” is an apt one to describe this large tax obligation that will be imposed on income that is attributed to but not actually received by a relatively small group of taxpayers. This article explains how this tax bomb was created and how the various statutes and regulations that define its scope and size have evolved over time from the original 2009 implementation of the IBR Plan up through the Department of Education’s proposed new Revised Pay as You Earn Plan (“REPAYE Plan”) rules that will be in force as of December of 2015. It then offers detailed illustrative calculations regarding its magnitude for both PAYE Plan and old IBR Plan law graduate enrollees, both for typical individual enrollees and in the aggregate. Based on the limited available Department of Education statistics I have estimated that the number of law graduates who will enroll in one or another of these Plans in 2015 and each year after that will be approximately equal in size to 50% of that year’s law school graduating class. Under the further assumption that Plan law graduate enrollees will experience average annual growth in their “real” incomes in the decades after their Plan enrollment of 2%/year, my estimate is that the aggregate impact of the tax bomb on lawyers alone will start at about $115 million in 2033 as it first impacts only about 1,650 lawyers in that year, but then the impact will grow rapidly to over $700 million per year by 2037 as it begins to affect tens of thousands of lawyers annually, and the size of the tax burden imposed will level off at about $1.2 billion/year indefinitely by 2040. Its impact will be even larger than this, perhaps significantly so, if the comparable and generally much smaller individual tax obligations that will be imposed on some medical school graduates Plan enrollees, and on some other graduate and professional school Plan enrollees, and on some of the many Plan enrollees who have borrowed only smaller sums for their undergraduate studies, are also considered. Finally, the article discusses whether measures should be taken to mitigate or even eliminate this tax bomb before these obligations begin coming due in 2033. I have concluded that no such measures are justified except for a minor amendment to the Internal Revenue Code allowing persons to pay their tax liabilities on forgiven student loan debt over a period of several years. However, I also discuss several other alternative measures that might be taken to reduce the tax bomb’s consequences, including the amendment of the Internal Revenue Code to abolish these consequences altogether.

Understanding How Information Affects Loan Aversion: A Randomized Control Trial of Providing Federal Loan Information to High School Seniors

ABSTRACTAlthough the literature offers evidence of students’ aversion to borrowing for postsecondary education, it offers no insight into whether such attitudes are mutable. Through a blocked, cluster-randomized controlled trial in six diverse high schools in Louisville, Kentucky, we test whether providing student loan and repayment information affects the borrowing attitudes and perceptions of high school seniors. The information treatment involves watching a short video during class that explains federal student loans and the advantages of income-based repayment, compared with control students receiving general information about reading financial aid award letters. Students’ attitudes toward loans are then captured on a survey. Results indicate that information about loans reduces loan aversion, both on our general measure of borrowing attitudes and on our specific measure of borrowing for education—the latter by 5 percentage points, corresponding to a 30% reduction relative to control baseline. We also consider two plausible mechanisms of the treatment effect and provide evidence to suggest that the information intervention improves college enrollment. These results indicate that providing information on income-based repayment options to high school students before they make the college enrollment decision could improve college access to populations who are averse to borrowing.

The rise in student loan defaults

We examine the rise in student loan defaults in the Great Recession by linking administrative student loan data at the individual borrower level to student loan borrowers’ individual tax records. A Blinder-Oaxaca style decomposition shows that shifts in the composition of student loan borrowers and the massive collapse in home prices during the Great Recession can each account for approximately 30% of the rise in student loan defaults. Falling home prices affect student loan defaults by impairing individuals’ labor earnings, especially for low income jobs. By contrast, when comparing the default sensitivities of homeowners and renters, we find no evidence that falling home prices affect student loan defaults through a home equity-based liquidity channel. The Income Based Repayment (IBR) program introduced by the federal government in the wake of the Great Recession reduced both student loan defaults and their sensitivity to home price fluctuations, thus providing student loan borrowers with valuable insurance against negative shocks.

The US college loans system: Lessons from Australia and England

There is wide agreement that the US student loan system faces significant problems. Seven million borrowers are in default and many more are not repaying for reasons such as returning to school, or economic hardship. The stress of repayments faced by many students results at least in part from the design of US student loans. Specifically, loans are organised like a mortgage, with fixed monthly repayments over a fixed period of time, creating a high repayment burden on borrowers with low income. This paper draws on the experience of the income-contingent loan (ICL) systems operating in England and Australia, in which monthly or two-weekly repayments are related to the borrower's income in that period, thus building in automatic insurance against inability to repay during periods of low income. We discuss the design of this type of loan in detail since such an exercise seems to be largely absent in the US literature. Drawing on data from the US Current Population Survey (CPS) we provide two main empirical contributions: a stylised illustration of the revenue and distributional implications of different hypothetical ICL arrangements for the USA; and an illustration of repayment problems faced by low-earning borrowers in the US loan system, including a plausible example of adverse outcomes with respect to Stafford loans. Importantly, we compare repayment burdens under the existing and alternative systems. Our illustrations show how US mortgage-type loans can create financial difficulties for a significant minority of US borrowers, difficulties which an ICL is designed to address. We note also that the current small and ineffective income-based repayment system in the US has few of the characteristics of an ideal ICL.

Reflections on the US College Loans System: Lessons from Australia and England

There is wide agreement that the US student loan system faces significant problems. Seven million borrowers are in default and many more are not repaying for reasons such as returning to school, or economic hardship. The stress of repayments faced by many students results at least in part from the design of US student loans. Specifically, loans are organised like a mortgage, with fixed monthly repayments over a fixed period of time, creating a high repayment burden on borrowers with low income. This paper draws on the experience of the income-contingent loan (ICL) systems operating in England and Australia, in which monthly or two-weekly repayments are related to the borrower's income in that period, thus building in automatic insurance against inability to repay during periods of low income. We discuss the design of this type of loan in detail since such an exercise seems to be largely absent in the US literature. Drawing on data from the US Current Population Survey (CPS) we provide two main empirical contributions: a stylised illustration of the revenue and distributional implications of different hypothetical ICL arrangements for the USA; and an illustration of repayment problems faced by low-earning borrowers in the US loan system, including a plausible example of adverse outcomes with respect to Stafford loans. Importantly, we compare repayment burdens under the existing and alternative systems. Our illustrations show how US mortgage-type loans can create financial difficulties for a significant minority of US borrowers, difficulties which an ICL is designed to address. We note also that the current small and ineffective income-based repayment system in the US has few of the characteristics of an ideal ICL.

Why Do Federal Loans Crowd out the Private Market? Evidence from Graduate Plus Loans

I investigate why federal student loans crowd out the private market by exploiting the introduction of graduate PLUS loans, which relaxed the federal borrowing limit on graduate students. After the expansion, students replaced private with PLUS loans nearly one-for-one, but did not increase borrowing. I use credit bureau data to compare private and federal loans, and show that most graduate students could receive private interest rates below the federal rates. Modeling students expected utilities, I find that the insurance provided by the federal income-based repayment option can rationalize most borrowers decisions to take out the higher interest federal loans.

Myth buster

Practice sustainability is a necessity for the viability of the mixed animal veterinary practice industry. To keep mixed animal practices thriving, a plan is needed to transition practices from 1 generation to another. Buying into a mixed animal practice is often promised to a new associate doctor but not fulfilled. The process often lacks communication and a good plan. Drs. Wenger and Middleton will share their experiences on how their practice has transitioned from 1 generation to another. They continue to focus on transition as new-generation partners are joining the practice. They will touch on how to value a mixed animal practice. Purchasing a practice is a return on investment for the owner that is selling and a huge investment for the new owner that is buying shares of the practice. Much has been written about valuing, buying, and selling small animal practices, but there is little information on how this to relates to mixed animal practices. Large student loan debts complicate the process and often stop the discussion because no solution is presented. Current student loan income-based repayment plans may create challenges to young veterinary practice owners due to an increase in income, thereby increasing student loan payments and creating cash flow dilemmas. Drs. Wenger and Middleton conclude that it is possible to become an owner with student loan debt and complicated loan repayment schedules, and will share their experience as to how to make it happen.

Students in Distress: Labor Market Shocks, Student Loan Default, and Federal Insurance Programs

The collapse in home prices during the Great Recession triggered a sharp drop in consumer demand by households, leading to massive employment losses. This paper examines the implications of these labor market shocks for the dramatic rise in student loan defaults, which originated during this time period. Linking administrative student loan data at the individual borrower level to de-identified tax records and exploiting Zip code level variation in home price changes, we show that the drop in home prices during the Great Recession accounts for approximately 24 to 32 percent of the increase in student loan defaults. Consistent with a labor market channel, we find a strong relationship between home prices, employment losses, and student loan defaults at the individual borrower level, which is concentrated among low income jobs. Comparing the default responses of home owners and renters, we find no evidence of a direct liquidity effect of home prices on student loan defaults. Lastly, we show that the Income Based Repayment (IBR) program introduced by the federal government in the wake of the Great Recession reduced both student loan defaults and their sensitivity to home price fluctuations, thus providing student loan borrowers with valuable insurance against adverse income shocks.

Job Search under Debt: Aggregate Implications of Student Loans

A dynamic equilibrium model of schooling, borrowing, and job search is developed to quantify the aggregate implications of student loans. In my model, risk-averse agents under debt tend to search less and end up with lower-paid jobs. Calibrating the model using micro data, I show that student loans have significant effects on borrowers' job search decisions under the fixed repayment plan. The income-based repayment plan (IBR) largely alleviates the burden of debt repayment by insuring labor market outcomes, allowing borrowers to conduct a more adequate job search. In general equilibrium, IBR also increases social welfare by encouraging college attendance.

The Developing Federal Student Loan Debacle and the Real Cost to Taxpayers

Government financed student loan debt of $1.3 trillion has grown 15% a year for over a decade as tuition and other college costs have risen at a multiple of the inflation rate. Problematic are defaults and income-based repayment arrangements with their partial loan forgiveness. Applied to this burgeoning balance they pose a serious burden on taxpayers and the economy that bear the costs and effects of borrowing and taxation to fund the program. Also alarming is the prospect of total loan forgiveness and ongoing free college education gaining political currency amid the wails of so many overextended borrowers, some of whom seemingly face lifelong debt. This paper examines the true cost of the student loan program which is enormously distorted by the U.S. Department of Education and the Congressional Budget Office. The reason is the Federal Credit Reform Act of 1990 (FCRA) requires government to adopt a misleading methodology for computing the program’s profit and loss that greatly understates defaults. As a result, the program is mistakenly believed to be profitable. Specifically, the government computes operating results based on a net present discounted value of future cash flows. This process effectively amortizes defaults over the remaining life of respective loans, which can be up to 20 years or more, rather than recognize them fully in the period they occur like a bank. The analysis herein contrasts this methodology (subject to the limitations of opaque federal accounting), with a pro forma presentation of operations based on generally accepted accounting principles (GAAP) observed by banks. The upshot: a $135 billion government projected profit for the ten-year period 2015-2024, versus a $1.9 trillion loss that a bank would report. As such, the real cost of the student loan program in the coming years compares with the losses of the 2008 financial crisis as explained in the study.And that is just the current student loan program. If blanket loan forgiveness were declared in the next decade, taxpayers would bear an immediate budget hit of $1 trillion to $4 trillion depending on the loans outstanding at the time of implementation. In addition, taxpayers would have to support subsequent free college for all thereafter. Not only is this time bomb concealed by the current accounting methodology, but also by the political class that is loathe to inviting opposition to a program that could be a new government entitlement.

An Economist's Perspective on Student Loans in the United States

In this paper, I provide an economic perspective on policy issues related to student debt in the United States. I lay out the economic rationale for government provision of student loans, summarize time trends in student borrowing, describe the US loan market, then turn to topics central to the policy discussion of student loans: whether there is a student debt crisis, the costs and benefits of interest subsidies, and the suitability of an income-based repayment system for student loans. I close with a discussion of the gaps in the data required to fully analyze and steer student-loan policy.

The Implications of Income-Based Repayment and Public Service Loan Forgiveness on Student Loan Debt

The Income-Based Repayment (IBR) plan decreases the burden of student loan debt for borrowers with high levels of debt or relatively low incomes. For borrowers with high debt or low income, student loan debt payments are based on income instead of the amount of debt and the interest rate. The unpaid balance is forgiven after 20 years. The Public Service Loan Forgiveness (PSLF) program allows unpaid student loan debt to be forgiven after 10 years for those that work for the government, non-profit, and other charitable organizations. There are numerous benefits and drawbacks to these programs.