Running Head: Student Loans

Student Loan Repayment and Forgiveness

Kyle Lynch
FV7649
Wayne State University
October 13, 2015

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Social Problem
Many Americans who attend college find themselves graduating with large and
sometimes debilitating amounts of debt. In America people are taught that they can achieve
anything if they work hard enough. For many people the route to success comes through
education. An education can open many doors and can allow people to climb both social and
economic ladders. At the same time, the cost of higher education has continued to rise. Most
people who attend college are not able to pay for school out of pocket. Because of this, many
people rely on loans to pursue education in hopes of being successful enough in their career to
pay back their debt. According to Clive R. Belfield, The author of Student Loans and
Repayment Rates: The Role of For-profit Colleges, 39 % of all undergraduates have student
loans, with an average annual federal student loan amount of $5,100; and cumulative amounts
borrowed by full-time full-year undergraduates are $13,010 in public institutions; $19,140 in
private not-for-profit institutions; and $16,380 at private for-profit colleges (2012).
Policies
There are policies in place through the federal government which give borrowers options
when it comes time to pay back their student loans. There are two types of loan repayment
including traditional and income-driven repayment plans. With these two types of repayment
there are eight repayment options. These options all offer advantages and disadvantages to the
borrower. These advantages come in the form of timeframe, payment amount, interest, and
number of payments. Each individual chooses an option which is most conducive to their life
and ability to repay their debt.
The first traditional option is a standard repayment plan. Carrie Johnson, author of
Understanding Federal Student Loan Repayment explains A standard repayment plan allows

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borrowers to make fixed monthly payments ($50 minimum) over a 10-year period. If the
standard repayment plan is chosen for a Direct consolidation loan, borrowers have up to 30 years
to repay the loan (2015). Repayment periods vary depending on the amount of debt the
borrower has. A major advantage to this repayment option is that under this option, the borrower
pays the least amount of interest on their debt.
The second traditional option is the graduated repayment plan. This plan is designed to
help individuals obtain manageable payment amounts after graduation. These payment amounts
increase over time, in hopes that the borrower will see increases in their income to offset the rise
in their student loan payment amounts. Payments increase every 2 years, with the loan balance
being paid off within 10 years. If the graduated repayment plan is used for a direct consolidation
loan, the borrower has up to 30 years to repay depending on the amount borrowed (Johnson,
2015). Many people find that the advantage to choosing this option is that as a persons income
raises, so does the amount they are expected to pay. This helps individuals manage the large
amount of debt they have just created while they begin a new career.
The third and final option of the traditional repayment plans is the extended repayment
plan. This plan extends the timeframe of repayment for individuals with higher amounts of debt.
Johnson explains, The extended repayment plan is for new borrowers after October 7, 1998 who
have a loan balance in excess of $30,000. Payments can be either fixed or graduated under this
plan, and borrowers have 25 years to repay their loan (2015). Extending the timeframe allowed
for people repaying large amounts of debt helps to make their debt more manageable. As the
cost of education is increasing so is the amount of debt students are graduating with. Allowing
borrowers more time to repay lenders is the largest benefit to choosing this repayment option.

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Income driven repayment plans take in to account the amount of many an individual is
earning in proportion to the amount to student loan debt one has. These payment plans are based
on the borrowers discretionary income. For an individual to qualify for income driven
repayment plans one must demonstrate partial hardship. When calculating discretionary
income for pay-as-you-earn and income based payments lenders use 150% of the poverty line in
comparison to the borrowers income to determine the amount of each payment. When
calculating the discretionary income for individuals opting for the income-contingent plan 100%
of the income poverty line is used in comparison to the borrowers income when determining the
payment amount. When choosing a repayment option, there is a lot to consider. All repayment
plans come with positive and negative factors one should consider when making a decision.
The income based repayment plan has two options. The original plan is offered to
borrowers who obtained their debt prior to July 1, 2014; and the new plan is offered to those who
borrowed after that date. The plans are differentiated as IBR and New IBR (newest repayment
plan). The original IBR plan payments is 15% of the borrower's discretionary income. The new
IBR plan uses 10% of discretionary income. With these plans, the repayment periods are 25 and
20 years, respectively, with any outstanding balance being forgiven(Johnson, 2015). Although
the repayment timeframe of these options are lengthy, they do offer lower payments and allow
the remainder of a borrowers debt to be forgiven. Choosing this option allows a borrower to
manage their funds in comparison to their income, as when their income increases so will the
payment amount. This means that when an individual starts their career in a lower paying job,
they will be able to manage their loan debt until they earn more income.
Another income driven repayment option is the pay-as-you-earn repayment plan. This
plan is for new borrowers on or after October 1, 2007; they must have received a disbursement

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on or after October 1, 2011. Monthly payments will be 10% of the borrower's discretionary
income. If the loan has not been repaid in 20 years, the outstanding balance will be forgiven
(Johnson, 2015). This policy is similar to the new IBR, but the criteria varies from the IBR with
the timeframe of when loans were taken as well as when they were dispersed. This is an option
that appeals to many borrowers as it is income driven, and the remaining debt is forgiven after
twenty years.
Lenders also offer an income-contingent repayment option. Under this option lenders
consider a persons discretionary income and determine whether twenty percent of their income
or a fixed payment over twelve years would be less. The income-contingent repayment monthly
payment is the lesser of 20% of discretionary income or what the borrower would pay on a
repayment plan with a fixed payment over 12 years. Borrowers have 25 years to repay their loans
under the income-contingent plan (Johnson, 2015). This option appeals to borrowers because it
considers which option is more affordable and allows forgiveness after twenty five years.
The final repayment option offered by lenders is the income sensitive repayment plan.
Johnson explains:
The income-sensitive repayment plan is for those low-income borrowers who have
Federal Family Education Loans (FFEL). The FFEL program, which ended on June 30,
2010, allowed borrowers to obtain a federal student loan through a lender other than the
federal government. The income-sensitive repayment plan is based on annual income,
and each lender uses its own formula to determine the monthly payment (2015).
Each lender offers different payment options charging a range of 425% of adjusted gross
income. This option is only available for FFEL loans, and has a maximum time of repayment of
ten years.

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While income driven repayment options are appealing to borrowers who are not earning
high incomes, there are some things to consider when selecting a repayment option. These plans
offer forgiveness after the payment requirements are met. While these funds are said to be
forgiven, they are still subject to income tax. This means that an individual would be responsible
for paying tax on the forgiven amount as if it was income. There are some forgiveness programs
available for borrowers who meet certain criteria which would exempt the income tax catch to
forgiving the remainder of their loan.
When it comes to repaying student loans there are options one may consider. Another
option one may have when graduating is the Direct Public Service Loan Forgiveness (PSLF).
The PSLF program was enacted in 2007. The program encourages graduates to obtain lower
paying public sector jobs. As compensation for filling these lower paying jobs, participants can
have their remaining debt resolved after making regular payments for ten years. When one
hundred and twenty consecutive payments have been made the remaining balance of the
students debt will be absolved. According to the article, New tool helps track student loan
forgiveness,
PSLF encourages students to enter lower-paying but critical public-sector jobs, such as in
public education and public health professions. Eligible borrowers who work full time at
a public service organization for at least 10 years while making 120 qualifying loan
payments may cancel the remaining balance of their loans (2012).
According to the Article the loan types that are eligible for the PSLF program are Federal Direct
Stafford/Ford, Federal Direct Unsubsidized Stafford/Ford, Federal Direct PLUS, and Federal
Direct Consolidation. Other loans may be eligible for PSLF, such as Federal Family Education

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loans, Federal Perkins loans, and some health professions loans, but only if they have been
previously consolidated in to a federal direct loan.
Some state governments have implemented policies at the state level to entice employees
to work in their state. Most of these incentives are targeted toward the public sector. The state of
Florida has created a committee to work closely with the government to create policy to forgive
student loans as a way to encourage people to work in Florida, especially lawyers. In the article
The Quest For Student Loan Forgiveness Rolls on, it is stated:
The Florida Bar Government Lawyer Section Recruitment and Retention
Committee was appointed by past immediate Chair Bob Krauss to educate and
study legislation in order to create loan repayment assistance plans for public
service and governmental lawyers in the State of Florida. Realizing that the state
should not lose its law school graduates to private practice due to high student
loan debt, this Committee has focused on how the State can provide financial
incentives to recruit and retain law school graduates for public service (Copelan,
2008)
This committee worked on important policy such as the College Cost Reduction and Access Act
of 2007. Many state level governments have worked to develop repayment, and forgiveness
options for borrowers.
Whats Working
The current system is functioning in a way that allows students to access education in
record amounts. There are loans offered by the government which can be subsidized or
unsubsidized. Subsidized loans are loans which a student is responsible for the balance, while
the government pays the interest. Unsubsidized loans, the borrower is responsible for both the

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balance and the interest charged on the loan. Student loans are taken while a student attends
college, but are repaid after graduation. The government even offers Pell Grants which are funds
for higher education which do not have to be repaid. Upon graduation the borrower has several
options. Some of the options are traditional payment plans with a set payment for a set number
of payments. Other options a borrower has are income driven. There are five policies that a
borrower may qualify for all of which base your payment on your income, and forgive any
remaining balance at the end of the set term. Another policy that is working is the Public Service
Loan Forgiveness (PSLF). This policy allows individuals in the public sector to have their
income driven student loan forgiven after ten years of successful payments or one hundred and
twenty consecutive payments. The policies in place for borrowing and repayment could use
some work, but overall it is working.
Whats Not Working
Currently, students are borrowing at record amounts. The cause of this is the increase in
the cost of higher education. According to the Federal Reserve Bank of New York, Americans
owe $902 billion in student loan debt. The Consumer Finance Protection Bureau estimates that
Americans owe $1 trillion dollars in student loan debt. According to the American Student
Assistance (ASA) $864 billion is provided by the Federal Government and $150 billion by
private lenders (Razaki, 2014). This translates to graduating students owing thousands of
dollars in student loan debt. Meta Brown, author of Grading Student Loans explains how these
figure factor out for graduating borrowers. Brown writes:
In 2012, the FRBNY estimated that about 25% of the student borrowers each owe more
than $28,000, 10% owe more than $54,000, 3% owe more than $100,000, and less than
1% (167,000) more than $200,000 (ASA 2012). In 2012, the College Board estimated

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that the median debt for all bachelors degree recipients at public four-year colleges and
universities was $7,960; $17,040 at private non-profit institutions; and $31,190 at forprofit institutions (ibid.). The average outstanding loan balance for all student borrowers
was $23,300 at the end of 2011 (As quoted in Razaki, 2014)
These figures give light to a larger problem. People are acquiring massive amounts of debt due
to the inflation of college tuition. All post high school educational costs have risen markedly
and steadily over the years. The cost of education at public four-year institutions shows a
growth rate of 6.5% from 2001 to 2010 (Razaki, 2014). Policy needs to be enacted to control
the cost of education in addition to the policies which are in place for borrowing and repayment.
The increase in tuition cost and student loan debt has had an effect on life after college.
An effect of the debt students acquire obtaining an education is the effect it has on the years
following graduation. In comparison to earlier generations, students who graduate currently are
finding themselves preoccupied with the debt they have just created. As a result of the pressure
this debt puts on new professionals, individuals are marrying, and having children later than
those before them. According to Robert Bozick and Angela Estacion, the authors of Do student
loans delay marriage? Debt repayment and family formation in young adulthood:
Couples evaluate their current economic resources in relation to these fixed costs, and
will be more likely to enter into marriage when they feel that their current resources are
sufficient to support these fixed costs. In applying student loan debt to this calculus, the
immediate liquidity constraints imposed by loan repayment should affect the decision to
marry, as it lowers young adults' ability to attain the minimum income threshold needed
to shoulder the costs of the wedding, home purchase, and children (2014).

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Individuals waiting to get married, buy a home, and start a family gives evidence that student
loan debt has effected the timing of life events for graduates following graduation when
compared to previous generations who graduated with little student loan debt.
Policy Timeline
Student Loans have been under reform for quite a while. The article Factors affecting
the student loan ABS marketplace explains: The Direct Loan program was created by the
Higher Education Amendments of 1992 as a pilot program and expanded by the Student Loan
Reform Act of 1993(DeZur, 2012). This is the program that allows students to borrow funds
backed by the government with subsidized and unsubsidized loans. The Direct Loan program
began operation in academic year 1994-1995 with 7 percent of overall loan volume. The program
now accounts for all new loan volume as of July 1, 2010(DeZur, 2012). There have been
policies put in place in recent years to help aid in repayment, and forgiving some debt. The
Student Loan public service program was passed in 2007. The Student Loan Simplification and
Opportunity Act was passed in 2011. And most recently, the Student Loan Forgiveness Act was
passed in 2012. All of these policies have been enacted to help aid Americans in obtaining
education.
Support and Opposition
The majority of individuals are in favor of helping students obtain their education and
manage repaying their student loans. In recent years momentum has been growing to gain
control over the cost of education. As the cost of tuition has gone up so has the level of debt that
students obtain. The majority of Americans support legislation to increase grants, and allow for
debt forgiveness. While the majority support student loan assistance, there are some who see

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issues with writing off the debt for students with large sums of debt. In the article The Problem
With Student-Loan Forgiveness explains this opposition.
Some researchers have raised concerns that current repayment options might
disproportionately benefit graduates of very expensive programs rather than borrowers
with lower incomes. This is particularly pronounced when it comes to graduate school.
While undergraduates can't take out more than $30,000 in federal loans, graduate students
can take out as much money as they like (Quinton, 2014).
While people have varying opinions on the student loan policies in our country, most would
agree that changes need to be made both to borrowing and repayment policies.
Interview
Kimberly Martin is a guidance counselor at Academy West high school in Flint, Mi.
Kimberly helps students through the process of applying to college and obtaining funds through
grants, scholarships, and loans. Kimberly has seen firsthand how the cost of education can be the
deciding factor for student deciding on a college (K. Martin, Personal Communication, 2015). I
see students begin their college education at the community college level in order to save on
costs (Martin, 2015). Martin expressed that the change in policy needs to come in the form of
creating options for students to obtain a trade or education at minimal cost (Martin, 2015).
Martin expressed that students are increasingly aware of the cost of tuition. I have had students
choose to delay college because they did not want to incur student loan debt (Martin, 2015).
Martin continued to express that the changes need to come through addressing the cost of
attending college.
Conclusion

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Student loan debt is something that effects many college graduates. 39% of people
graduate with a four year degree owing student loan debt. 69% of people graduating with a
masters degree graduate owing student loan debt. The government does offer subsidized and
unsubsidized loans, as well as eight possible repayment plans. These policies began in the early
nineties. From 2007-2012 there has been legislation geared toward loan forgiveness. Most
people agree with this legislation, but there are some doubts. Opponents of these policies feel
that forgiving debt may lead to irresponsible borrowing. The real change needs to come with
controlling the cost of higher education.

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References
Belfield, C. (2012). Student Loans and Repayment Rates: The Role of For-profit Colleges.
Research in Higher Education Res High Educ, 1-29. Retrieved September 21, 2015, from
Springer Link.
This article discusses the rate of debt among college students. The text compares debt
among student who attend public or not for profit colleges against students who attend for
profit colleges. Students who attend for profit colleges on averages borrow four times as
much money as those who attend public not for profit colleges and universities.
Bozick, R., & Estacion, A. (2014). Do student loans delay marriage? Debt repayment and family
formation in young adulthood. Demographic Research, 30, 1865+. Retrieved from
http://go.galegroup.com.proxy.lib.wayne.edu/ps/i.do?id=GALE
%7CA384439367&v=2.1&u=lom_waynesu&it=r&p=AONE&sw=w&asid=04d0aec852
697bf4764e0bfefc37c586
The information in this article discusses the impact of student loan debt on the formation
of families. Student loan debt is at an all-time high. At the same time people are starting
families later in life. This study looks at the student loan debt among men and women
and what effect it has on their relationships. The study finds that student loan debt does
delay marriage and families in the years following graduation, but this is because of
women. Women are not comfortable making such large commitments after inquiring
such debt.
Copelan, J. J., Jr., & Ignatius, R. (2008, November 1). The quest for student loan forgiveness
rolls on. Florida Bar News, 35(21), 20. Retrieved from
http://go.galegroup.com.proxy.lib.wayne.edu/ps/i.do?id=GALE

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%7CA193246968&v=2.1&u=lom_waynesu&it=r&p=ITOF&sw=w&asid=5d4ad90c1ffd
efc4388403396bc2e806
This article discusses legislation in Florida to retain public service employees. The state
began its efforts as a response to loosing many of its law school graduates to private
practice due to high volumes of student loan debt. This incentive involves a commitment
period. Florida has recognized that student loan debt is a determining factor for people in
the job market. This incentive helps level the playing field.
DeZur, S., & Sampson, V. (2012, Summer). Factors affecting the student loan ABS marketplace.
Journal of Structured Finance, 18(2), 57+. Retrieved from
http://go.galegroup.com.proxy.lib.wayne.edu/ps/i.do?id=GALE
%7CA299537328&v=2.1&u=lom_waynesu&it=r&p=ITOF&sw=w&asid=c8821f7d8dcb
123f5b51a3cd318bfe8a
This article discusses Asset Based Securities and their effect on student loans. The ABS
market is on the rise. The article also discusses private student loans, and Nonprofit and
State Agency Student Loan Organizations. The information also states what President
Obama had done for student loans, particularly the Student Loan Simplification and
Opportunity Act of 2011, The Fairness for Struggling Students Act, and The Student
Loan Forgiveness Act of 2012. The article also details many other legal rules for student
loans.
Johnson, C. (2015). Understanding Federal Student Loan Repayment. Family and Consumer
Sciences Research Journal Fam Consum Sci Res J, 306-312. Retrieved September 22,
2015, from
http://onlinelibrary.wiley.com.proxy.lib.wayne.edu/doi/10.1111/fcsr.12108/full

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This article outlines the options for a student for repaying their student loans. Sixty-nine
percent of students who graduate have student loan debt. There are eight federal
repayment plans. The text discusses each option. The text also discusses the need for
educating borrowers.
New tool helps track student loan forgiveness. (2012, April 3). ASHA Leader, 17(4), 4. Retrieved
from http://go.galegroup.com.proxy.lib.wayne.edu/ps/i.do?id=GALE
%7CA287181866&v=2.1&u=lom_waynesu&it=r&p=ITOF&sw=w&asid=a4fdf16ff6bd1
80ce30e6c776137974f
The author explains what the student loan forgiveness act is, and the options for utilizing
it. There are four types of loans that are eligible for the PSLF (public service loan
forgiveness). Forgivable Loans include Federal Direct Stafford/Ford, Federal Direct
Unsubsidized Stafford/Ford, Federal Direct PLUS, Federal Direct Consolidation.
Individuals must be employed in the public sector.
Quinton, S. (2014, April 21). The Problem With Student-Loan Forgiveness. Nationaljournal.com.
Retrieved from http://go.galegroup.com.proxy.lib.wayne.edu/ps/i.do?id=GALE
%7CA365468716&v=2.1&u=lom_waynesu&it=r&p=ITOF&sw=w&asid=0b0a51e16b9
7844db0266358352652d3
This article talks about the problem with student loan forgiveness programs. The author
talks about what options are out there, and who qualifies for what option. The main
problem the author cites for borrowers, is that they do not know all of their options.
Many people do not take advantage of the policy.

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Razaki, K. A., Koprowski, W., & Lindberg, D. L. (2014). THE STUDENT LOAN CRISIS:
BACKGROUND, MOTIVATIONS OF PARTICIPANTS, AND REGULATORY
ISSUES. Journal Of Business & Accounting, 7(1), 94-105.
This article discusses the history of student debt, and how it had led to the current crisis.
It talks about the volume of borrowing. The text investigates the motives of all involved
parties. Involved parties include the student, school, lender, government to name a few.
The article talks about current policy , and what should be done in the future.
Martin, K. (2015, October 2). Student Loan Policy [Personal interview].