Potential Winners and Losers in a Scholar Mortgage Proposal


Low-income borrowers (below $ 19,320 for a single person and $ 39,750 for a family of four in 2021) are not making payments under any existing income-based plans, so reducing the income paid will not help them.

Modest income borrowers pay less for their loans, but some pay longer. For example, Urban Institute’s Sandy Baum estimates that a borrower with $ 30,000 in debt and an initial income of $ 38,000 would pay 20 years on a 5 percent plan, instead of 15 years on the current 10 percent plan.

The benefit amount would often be higher for people with higher debts. The hypothetical $ 30,000 borrower would likely save about $ 9,000, compared to $ 24,000 for someone of the same income who borrowed $ 50,000.

The borrowers with the highest incomes and debts – such as doctors, lawyers, and others with college degrees – would benefit the most. Under current policy, typical individual borrowers with $ 150,000 in debt and a starting salary of $ 100,000 would eventually repay all of their loan. Offering them a 5 percent plan would cut their monthly payments in half and allow a significant portion of the forgiveness of the remaining balances.

The Congressional Budget Office estimates that a more modest reduction in the income share (from 10 percent to 8 percent) would cost more than $ 26 billion over the next 10 years, and most of the benefits would benefit college graduate borrowers. A rough estimate would put the cost of a 5 percent plan to taxpayers at about $ 65 billion.

What are the alternatives to a 5 percent repayment plan? One is to vary the percentage of income paid based on the borrower’s income. For example, borrowers pay 5 percent of the first $ 10,000 of their disposable income and 10 percent of the amount above. Or there could be even more differentiated rates, similar to the US tax system. This change would make payments more affordable for low- and middle-income borrowers while avoiding new billion-dollar subsidies for the relatively wealthy.

Dealing with the challenges most borrowers face would require bigger changes than tinkering with the portion of income paid in a repayment plan that many borrowers don’t even know about. In some countries, borrowers pay back directly through the withholding tax system, which reduces paperwork and loan administration. But proposals to move to such a system in the United States have yet to gain momentum.