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This article provides the first comprehensive analysis in the legal literature of the federal government’s new income-driven student loan repayment programs, known as Income-Based Repayment and Pay As You Earn. In a set of gradual and little-noticed statutory and regulatory moves, the federal government, through these programs, has dramatically reshaped higher education finance in ways that schools, students, and even the government itself are only beginning to understand.

Under IBR and PAYE, a student borrower pays no more than 10% of her discretionary income in loan service payments, and after a maximum of 20 years, the remaining debt is forgiven—for any borrower, regardless of degree, career, or debt load. This article argues that such an income-driven system is analogous to the federal government paying the up-front costs of higher education, but raising that money from a 10% “surtax” on the incomes of graduates. This is a huge change from the current mixture of debt-financed tuition, need-based grants, and moderate state subsidies.

This framing raises important questions. Is this income-driven repayment structure appropriate? How tax-like and progressive are IBR and PAYE in fact, and can they be made more (or less) so? What are the risks and downsides of such a structure? This article claims that using a tax-like instrument such as income-driven repayment is well suited for higher education, given its economics, financial characteristics, and social benefits. In particular, the key difference between income-driven repayment and up-front need-based grants, such as Pell Grants, is that income-driven repayment makes a judgment of need based on ex post graduate income, rather than ex ante parental income. Based on this analysis, this article concludes with some novel suggestions for reform to PAYE.

Publication Citation

104 Geo. L.J. 229