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How do income-driven repayment plans benefit student debt borrowers?

Author

Listed:
  • Catherine, Sylvain
  • Ebrahimian, Mehran
  • Yannelis, Constantine

Abstract

Using credit bureau data, we show that nearly half the increase in student debt since 2010 is due to deferred payments and the expansion of income-driven repayment (IDR) plans. These plans help borrowers smooth consumption, insure income risk, and reduce the effective debt cost. Using a life-cycle model, we quantify the welfare gains from this payment deferment and the channels through which welfare increases. We show that an optimally calibrated plan can achieve similar welfare gains at a much lower cost to taxpayers, and without encouraging additional borrowing. Finally, we use our quantitative framework to evaluate recent proposals to reform IDR rules.

Suggested Citation

  • Catherine, Sylvain & Ebrahimian, Mehran & Yannelis, Constantine, 2026. "How do income-driven repayment plans benefit student debt borrowers?," Journal of Financial Economics, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:jfinec:v:178:y:2026:i:c:s0304405x26000243
    DOI: 10.1016/j.jfineco.2026.104253
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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality

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