A Closer Look at Subsidized Stafford Loans

In a recent blog post, Jason Delisle and Alex Holt, colleagues at the New America's Foundation Education Budget Project, argue for the elimination of the interest-free benefit on Subsidized Stafford student loans. This stems from their argument that the introduction of the new Income-Based Repayment (IBR) plan for federal student loans renders Subsidized Stafford loans regressive, since the actual beneficiaries of this arrangement are borrowers with higher incomes as opposed to those in the lower income brackets. They write:

Subsidized Stafford loans now provide regressive benefits. That is, they target benefits to borrowers earning higher incomes in repayment. That is due to the new Income-Based Repayment (IBR) plan for federal student loans that took effect this month.

The new plan (“New IBR”) sets a borrower’s payments at 10 percent of discretionary income and forgives any debt after 20 years. Those benefits effectively make Subsidized Stafford loan benefits redundant for borrowers who earn a lower or middle income in repayment. Borrowers earning higher incomes, on the other hand, will still earn benefits from Subsidized Stafford loans in the form of reduced total payments.

Using the New America Foundation IBR calculator, a number of possible scenarios were run to determine the benefits for borrowers in all income brackets after the repayment of loans. the analysis showed that the only group of borrowers who benefit from the Subsidized Stafford student loans are those who earn middle income salaries immediately after school or those who end up with a higher incomes. The table below, reproduced from their post, shows that.

They argue that this evidence should quell fears that scrapping the Subsidized Stafford student loan program will place undue hardships or financial burdens on lower income college students. For example, the Budget Control Act signed in August of last year eliminated the interest subsidy for graduate students and put the savings towards Pell Grants, which Delisle and Holt believe will significantly benefit lower-income students on net. They conclude:

In short, with the availability of New IBR, Subsidized Stafford loans provide no additional aid to borrowers who need it most, while reducing payments for borrowers who are not struggling to repay. That should help persuade lawmakers and the student aid advocacy community that it would be prudent policy to end the Subsidized Stafford benefit and use the money instead to aid lower income college students through the Pell Grant program. The New IBR plan is now by far the most beneficial repayment plan available to low-income borrowers, so much so that it renders other, more poorly targeted benefits obsolete.

The full blog post can be found here.