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October 27, 2021 

Dr. Rajeev Darolia 

Wendell H. Ford Professor of Public Policy 

Martin School of Public Policy and Administration 

University of Kentucky 

413 Patterson Office Tower 

Lexington, KY 40506-0027 

Dear Dr. Darolia: 

– 8th The Department of Education’s first session of negotiated rulemaking meetings ran from October 4th . Before the session 

started, the Department released issue papers outlining questions and proposed regulations for the committee to consider. 

Among other important financial aid topics, reforming income-driven repayment plans was a central focus of the discussion. As 

prior Pew research has summarized, despite offering affordable payments and reduced risk of delinquency and default to many 

borrowers, those enrolled in IDR often report unaffordable payments, growing balances, and confusing enrollment processes. 

The IDR issue paper and subsequent discussion focused on changes to the underlying IDR formula that could help address some 

of these issues. 

To understand how some of the changes under consideration could affect repayment outcomes, we model potential changes to 

the IDR formula discussed by the negotiated rulemaking committee based on the design of the REPAYE repayment plan, the 

most generous income-driven repayment plan. Under REPAYE, payments are set at 10% of discretionary income, with 150% of 

income relative to the Federal Poverty Level (FPL) exempted from the payment calculation. Payments are required for 240 

months for undergraduate borrowers and 300 months for graduate borrowers if borrowers do not pay off their loans earlier, 

with the remainder of loan balances forgiven. The three reform options discussed are: 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2005 Market Street, Suite 2800 

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1. Lowering the percentage of discretionary income used to calculate payments from 10% (the figure used for the 

most recent and commonly used plans) to 5%. 

2. Increasing the amount of income protected from the payment calculation. 

a. Current plans exempt 150% of the federal poverty guideline from borrowers’ incomes and uses the 

difference to calculate payments. 

3. Limiting interest accrual in IDR plans to that which a borrower would accumulate if they were enrolled in a 

Standard repayment plan. 

Baseline estimates 

To estimate the effects of potential changes to the IDR formula, we created a set of example borrowers, with income, debt, and 

annual increases in income estimated for borrowers without a degree, an associate degree, a bachelor’s degree, and a graduate 

degree. Median incomes for these example borrowers were produced using the 2016 American Community Survey; median 

federal loan balances were produced using the 2016 National Postsecondary Student Aid Study and 2012/2017 Beginning 

Postsecondary Students Longitudinal Study. 

To reflect realistic repayment scenarios, borrowers are assumed to have dependents, with marital status and number of 

dependents for each example borrower produced using the 2016 American Community Survey. The interest rates used are the 

rates for loans disbursed during the current academic year. The FPL is assumed to increase by 2.42% each year, in keeping with 

the increase assumed by the Office of Federal Student Aid’s Loan Simulator. See the attached methodology for an explanation 

of our assumptions related to borrowers’ starting income, income growth, balance size, and family size. Due to data limitations, 

graduate borrower examples are for single borrowers, rather than reflecting an estimated family size. For context, single 

borrowers have a smaller amount of income protected by the FPL guideline than borrowers with families. This may make their 

monthly payments, and total amount paid, larger over time. 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table 1: Borrower Assumptions 

No Degree AA BA Graduate 

Repayment Inputs 

Income $26,725 $38,780 $53,450 $66,220 

Debt $9,070 $22,200 $43,900 $55,450 

Average Annual Income Increase 0.50% 1.50% 2.50% 3.50% 

Interest Rate 3.73% 3.73% 3.73% 5.10% 

Family Size 

Married No No Yes No 

Dependent Children 2 2 2 0 

Total Family Size (Including Borrower) 3 3 4 1 

And as a baseline for this analysis, here are the repayment outcomes we estimate for borrowers who are enrolled in REPAYE. 

Table 2: Estimated REPAYE outcomes 

No Degree AA BA Graduate 

Monthly Payment Range $0-45 $42-178 $118 – 373 $392 - 645 

Total Amount Paid $3,628 $32,605 $62,439 $80,906 

Projected Loan Forgiveness $10,606 $1,279 $7,261 $0 

Repayment Period (in months) 240 240 240 161 

Monthly payment amounts are reported as ranges between the lowest and highest payment required throughout repayment. 

Under the current REPAYE formula, a borrower who has not completed their degree will repay about a third of their original 

balance, with payments held low throughout repayment. In contrast, associate’s, bachelor’s, and graduate degree holders repay

more than their original balance. In this scenario, graduate borrowers repay their loans significantly ahead of the 300-month 

threshold. 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THE 

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C H ARITABLE TRUSTS 

2005 Market Street, Suite 2800 

Philadelphia, PA 19103-7077 

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Washington, DC 20004 

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202.552.2000 

Lowering the percentage of discretionary income used to calculate payments to 5% 

The first option modeled lowers the percentage of discretionary income used to calculate payments from 10% to 5%. Lowering 

the payment calculation to 5% has a sizable impact on each borrowers’ monthly payment range, total amount paid, and

projected loan forgiveness. The difference between REPAYE and the proposed changes are noted in parenthesis; changes that 

decrease these factors are noted in green, while those that increase these factors are noted in red. 

Table 3: Estimated outcomes with 5% of discretionary income used to calculate payments 

No Degree AA BA Graduate 

Monthly Payment Range 

$0-23 

(-$22) 

$21-89 

(-$89) 

$59-186 

(-$187) 

$196-488 

(-$157) 

Total Amount Paid 

$1,814 

(-$1,814) 

$16,302 

(-$16,303) 

$31,219 

(-$31,220) 

$96,611 

(+$15,705) 

Projected Loan Forgiveness 

$11,807 

(+$1,201) 

$21,454 

(+$20,175) 

$44,212 

(+$36,951) 

$23,054 

(+23,054) 

Repayment Period (in 

months) 240 240 240 

300 

(+139) 

While payments remain at $0 for the majority of repayment for a borrower with no degree (similar to their current outcome in 

REPAYE), borrowers with associate’s, bachelor’s, and graduate degrees see significant decreases in their monthly payments

throughout the course of repayment. 

The total amount paid for each example borrower would be roughly half of what they would pay under the current REPAYE 

design, except for the graduate borrower, who would repay significantly more than what they would repay under the current 

REPAYE plan. This is because their lowered payments cover less of the monthly accruing interest, allowing the balance to grow 

over time and extending the length of the repayment term. 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THE 

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C H ARITABLE TRUSTS 

2005 Market Street, Suite 2800 

Philadelphia, PA 19103-7077 

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Washington, DC 20004 

www.pewtrusts.org 

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Accordingly, projected loan forgiveness for every borrower scenario would also be much higher in this scenario compared to 

repayment in REPAYE. The decreased monthly payments cover less of the accruing interest each month, resulting in a greater 

balance eligible for forgiveness at the end of repayment. This effect is most pronounced for the borrower with a bachelor’s

degree, who would have nearly $40,000 more eligible for forgiveness than they would under the current REPAYE plan design. 

The graduate borrower would now qualify for forgiveness, while they would have paid off their loan prior to the forgiveness 

threshold under the current plan design. 

Increasing the amount of income protected from the income-driven payment calculation by the Federal Poverty Level (FPL) 

guideline 

A second option could be to increase the amount of income protected using FPL guidelines to make payments more affordable 

for borrowers. For example, here is how repayment would be affected if the Department exempted 200% of the FPL from 

borrowers’ income—a 50 percentage point increase over the current 150% used in REPAYE payment calculations. 

Table 4: Estimated outcomes with 200% of the FPL exempted from borrowers’ incomes

No Degree AA BA Graduate 

Monthly Payment Range 

$0-0 

(-$45) 

$0-108 

(-$70) 

$9-259 

(-$114) 

$339-620 

(-$25) 

Total Amount Paid 

$0 

(-$3,628) 

$17,116 

(-$15,489) 

$37,740 

(-$24,699) 

85727.69 

(+$4,822) 

Projected Loan Forgiveness 

$12,714 

(+$2,108) 

$19,408 

(+$18,129) 

$34,546 

(+$27,285) $0 

Repayment Period (in months) 240 240 240 

186 

(+25) 

Compared to the 5% option, increasing the FPL to 200% has large effects on the example borrower with no degree. In this 

scenario, they would not make any payments, while they would still end up repaying $1,814 under the 5% of discretionary 

income reform scenario (see Table 3). Minimum payments for both borrowers with associate’s and bachelor’s degrees are 

significantly lower than what they would be under the 5% of discretionary income proposal—which may help borrowers as they 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THE 

PEW 

C H ARITABLE TRUSTS 

2005 Market Street, Suite 2800 

Philadelphia, PA 19103-7077 

901 E Street NW 

Washington, DC 20004 

www.pewtrusts.org 

215.575.9050 Phone 

202.552.2000 

graduate and get started with their careers in lower-paying positions. In contrast, final monthly payments would be higher for 

both associate’s and bachelor’s degree borrowers than in the 5% proposal.

Because of these factors, borrowers with associate’s and bachelor’s degrees repay a higher total amount than they would under 

the prior proposal. Accordingly, the remaining balance eligible for forgiveness for associate’s and bachelor’s degree borrowers is

lower than the 5% reform option because of higher totals paid over time. Graduate borrowers repay more than in REPAYE, but 

less than what they would under the 5% of discretionary income scenario. This leads to a situation where, under the 200% 

scenario, the graduate borrower would pay off their loans well before the same borrower would under the 5% scenario. 

As seen in Table 5, increasing the percentage of the FPL guideline that protects borrowers’ income even further to 250% has a

similar but more pronounced effect. 

Table 5: Estimated outcomes with 250% of the FPL exempted from borrowers’ incomes

No Degree AA BA Graduate 

Monthly Payment Range 

$0-0 

(-$45) 

$0-47 

(-$131) 

$0-146 

(-$227) 

$144-616 

(-$29) 

Total Amount Paid 

$0 

(-$3,628) 

$5,017 

(-$27,588) 

$20,655 

(-$41,784) 

$92,710 

(+$11,804) 

Projected Loan Forgiveness 

$12,714 

(+$2,108) 

$28,611 

(+$27,332) 

$51,147 

(+$43,886) $0 

Repayment Period (in months) 240 240 240 

219 

(+58) 

An increase to 250% would make this reform option a more substantial benefit than lowering the share of discretionary income 

used to calculate monthly payments to 5%. For example, if increased to 250%, the median borrower with a bachelor’s degree’s

minimum payment would be $0 and increase to a maximum of $146 by the end of the 20-year repayment period versus a 

higher payment range in the 5% option. However, note that the median borrower with no degree would not see an increased 

benefit by raising the FPL guideline to 250%, as they are already repaying $0 under the 200% scenario. 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THE 

PEW 

C H ARITABLE TRUSTS 

2005 Market Street, Suite 2800 

Philadelphia, PA 19103-7077 

901 E Street NW 

Washington, DC 20004 

www.pewtrusts.org 

215.575.9050 Phone 

202.552.2000 

As expected, total amount repaid is driven lower for borrowers with associate’s and bachelor’s degrees compared to the 200%

option. The effect for graduate degree borrowers is more nuanced. Raising the FPL protected amount to 250% would lead to the 

graduate borrower having lower payments, but paying a larger amount over time than in the 200% scenario, as the lower 

monthly payments resulting from raising the FPL would extend the time until this borrower would receive forgiveness. 

Capping interest accrued at what would be paid in the Standard Plan 

Affordable payments are an important part of the repayment equation, but research also shows that growing balances may 

cause borrowers to disengage with the repayment system, as the prospect of forgiveness may seem intangible. Limiting the 

amount of interest repaid in an IDR plan is one way to prevent growing balances, and may be an important route to consider as 

reform options that lower payments may also increase the amount of unpaid interest that borrowers accumulate. For example, 

Table 6 shows how amounts repaid in REPAYE would differ if interest accrual were capped at the amount of interest that would 

accumulate for the same borrower if they were enrolled in the Standard, 10-year repayment plan. 

Table 6: Estimated outcomes if interest is capped at the Standard Plan 

No Degree AA BA Graduate 

Monthly Payment Range $0-45 

$42-177 

(-$1) 

$118-354 

(-$19) 

$392-621 

(-$24) 

Total Amount Paid $3,628 

$27,045 

(-$5,560) 

$53,481 

(-$8,958) 

$72,165 

(-$8,741) 

Projected Loan Forgiveness 

$7,422 

(-$3,184) 

$0 

(-$1,279) 

$0 

(-$7,261) $0 

Repayment Period (in months) 240 

209 

(-31) 

216 

(-24) 

147 

(-14) 

While affordability as measured by monthly payment range changes very little as a result of capping interest alone, total 

amount paid and projected loan forgiveness are generally decreased for each example borrower. While these decreases are less 

than those observed in the scenarios related to discretionary income and the FPL, this is primarily the result of limiting interest 

accrual, as borrowers will have less to repay under this reform option. Accordingly, time spent in repayment is also lower for 
 

 

 

 

 

 

 

 

 

 

 

 

 

THE 

PEW 

C H ARITABLE TRUSTS 

2005 Market Street, Suite 2800 

Philadelphia, PA 19103-7077 

901 E Street NW 

Washington, DC 20004 

www.pewtrusts.org 

215.575.9050 Phone 

202.552.2000 Phone 

associate, bachelor’s, and graduate degree borrowers under this plan, which may help address the discouragement some 

borrowers feel in response to growing balances. 

Conclusion 

Income-driven plans are an important tool that can help borrowers avoid delinquency and default, and enrollment in such plans 

has increased substantially over the past decade. However, research suggests they can be further improved to help struggling 

borrowers make more affordable payments and to reduce balance growth across the portfolio. The reforms modeled above are 

just a few of many potential options that the committee can pursue throughout this fall’s rulemaking session. Such reforms

could be implemented individually or done at the same time to amplify the benefit to borrowers. As policymakers move forward 

with reforms, they should weigh the benefits and drawbacks of how different plan design approaches would impact those most 

likely to be delinquent or default on their loans, or experience balance growth over time. 

The Pew Charitable Trusts appreciates the opportunity to provide this data to you and the negotiators. We welcome any 

questions you might have. Please be in contact with Regan Fitzgerald, Manager, the Project on Student Borrower Success, 

rfitzgerald@pewtrusts.org. 

Sincerely, 

Regan Fitzgerald Lexi West 

Manager Senior Associate 

Brian Denten 

Senior Associate