> Critics, including academics across the political spectrum, say the income-based repayment program isn’t targeting the neediest borrowers and instead bestows big benefits on those who attend pricey colleges and graduate schools and earn high incomes.
Take a new surgical resident who just graduated from med school with a slightly above average amount of debt - $300k [0]. They consolidate their loans and put themselves on an income based repayment plan, and start their residency at a nonprofit hospital. After 120 payments (at most one per month) made while working for a 501(c), their remaining loan is forgiven, tax-free. [1]
At the outset, the income based plan really is the only option. They'll be earning a modest salary as a resident - 40-60k per year. During this period their debt will accumulate unpaid interest as their payments are capped at 10% of their income (above 1.5x the poverty line, so something like max_payment = 0.10*(income-20k); $200-300 a month, at most). After ~7 years of surgical residency, depending on specialty, the doctors begin earning $300k-$500k/year. At this point their total loan amount at 7% simple interest (unpaid interest isn't compounded under these programs) has grown somewhere on the order of 40-50%. Now they are making the maximum payment on their debt assuming a 20-25 year repayment term. Unfortunately, they'll only be making those payments for 3 years before the entire balance of the loan is forgiven - tax free.
The end result is that for doctors whose residency and subsequent career begins by working at nonprofit hospitals, the government will end up forgiving the full amount of their medical school tuition, usually plus a little bit of interest. Med schools, law schools, and other professional schools know this, and actively promote these programs as a way for students to justify going into unbelievable levels of debt. [2]
In general, those with less than about $40k in debt will see no change to their monthly payment by moving to an income based repayment program, so they have little incentive to go through the hassle of signing up.
[0] http://grad-schools.usnews.rankingsandreviews.com/best-gradu...
[1] https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancell...