What If Student Loan Payments Were Tied to Your Paycheck?

Quick: After home mortgages, what’s the next-largest liability for American households? It’s student loan debt, which totals a staggering $1.8 trillion.

While student loans make higher education more accessible, paying them off can be difficult for people with low incomes.

“College is a large but risky investment that may or may not pay off,” de Silva says.

Income-contingent payment plans provide borrowers with type of risk protection that he likens to the equity-based financing available to corporations.

The results, published in The Quarterly Journal of Economics, revealed that while income-based repayment does cause borrowers to earn less,

these costs are more than offset by the benefits of providing insurance to low-income borrowers through repayment reductions.

In short, income-contingent repayment plans have a net-positive effect, as de Silva explains:

“They do distort household labor supply in a non-trivial way, but the value of the insurance benefit they provide is much larger.”