Student Loan Repayment Options

American students are graduating from college averaging tens of thousands of dollars in debt, leading to substantial repayment burdens and potentially inefficient shifts in spending patterns and career choices. A political trend towards austerity coupled with the rising student debt make effective allocation of federal higher education resources a high priority. The repayment option students currently start in after graduation, standard, was the cheapest option, and the only one estimated to impose a significant repayment burden on the borrower, ranging up to 12 percent of pretax income for people in the poorest income quintile. Of the three income-contingent repayment options modeled, the Student Loan Fairness Act (SLFA) is estimated to be the most expensive, with an average subsidy of $16,630 for the lowest income quintile. The net present value of loan repayment for SLFA is 42 percent of the amount repaid in the standard scheme, reducing government revenues. To evaluate robustness and demonstrate the impact of rapidly growing student debt, individuals were allocated debt at 1993 and 2008 levels, which significantly increased the relative public cost of every income contingent plan. The evidence gathered indicates student loan repayment design is heavily influential in both individual abilit