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

Sylvain Catherine, Mehran Ebrahimian and Constantine Yannelis

No 33059, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G50 H52 I20 (search for similar items in EconPapers)
Date: 2024-10
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