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How Do Income-Driven Repayment Plans Benefit Student Debt Borrowers?

Author

Listed:
  • Sylvain Catherine
  • Mehran Ebrahimian
  • Constantine Yannelis

Abstract

Using credit bureau data, we show that nearly half the increase in student debt since 2010 is due to deferred payments and the expansion of income-driven repayment (IDR) plans. These plans help borrowers smooth consumption, insure income risk, and reduce the effective debt cost. Using a life-cycle model, we quantify the welfare gains from this payment deferment and the channels through which welfare increases. New, more generous rules further subsidize borrowers without yielding net welfare gains. We show that an optimally calibrated plan can achieve similar welfare gains at a much lower cost to taxpayers, and without encouraging additional borrowing.

Suggested Citation

  • Sylvain Catherine & Mehran Ebrahimian & Constantine Yannelis, 2024. "How Do Income-Driven Repayment Plans Benefit Student Debt Borrowers?," NBER Working Papers 33059, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33059
    Note: AP CF ED LS PE
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    More about this item

    JEL classification:

    • G50 - Financial Economics - - Household Finance - - - General
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • I20 - Health, Education, and Welfare - - Education - - - General

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