The Hutchins Center on Fiscal & Monetary Policy and the National Consumer Law Center’s Student Loan Borrower Assistance Project hosted a series of informal dialogues in 2021 on student loans between people with very different views on the nature of the problem and the best prospective solution. The conversations, led by the Convergence Center for Policy Resolution, were not intended to reach consensus and did not. However, the recent emphasis on income-contingent repayment as a way to ease the burden on student borrowers after the expiry of the COVID-triggered moratorium on student loan repayment – including proposals made by President Biden and the Department of Education – led two of the organizers to write this discussion of some IDR problems and the pros and cons of some oft-mentioned solutions. This essay does not represent the views of Brookings or NCLC or the views of participants in the Convergence Dialogue, although it has benefited from the input of some of them.
Unlike most other loans, the repayment capacity of the borrower is not taken into account when granting a student loan. Income-Based Reimbursement was designed to protect student borrowers from financial hardship – to insure borrowers against the risk that their studies will not pay off in the form of higher salaries. (It was also seen by some as a way to help borrowers who chose low-wage careers in the civil service.) Although the details have changed considerably over the years, the basic design is simple: pay a percentage of your monthly income above a certain threshold for a certain number of years – possibly zero payments in certain months – and you are eligible for cancellation of any remaining balance after a certain period, usually longer than the period 10-year standard for loan repayment. About one in three student loan borrowers whose loan comes directly from the government, known as a direct loan borrower, is enrolled in some form of IDR, according to data from the Ministry of Education.
Discussion of income-driven repayment dates back to at least the 1950s, and Congress created a pilot program in 1992. The report, “Income-Driven Repayment of Student Loans: Problems and Options for Addressing Them,” summarizes the evolution of the IDR over the past. three decades. It also identifies IDR-related issues and the pros and cons of the solutions that have been proposed to address them, including:
- Few borrowers have historically used IDR, including some who would likely have qualified for reduced payments and possible forgiveness. Many borrowers are never aware of IDR, and while federal loan contracts with departments have improved, IDR is a bureaucratic challenge and departments have not always had an incentive to register borrowers for IDR. .
- Borrowers who enroll in IDR plans often fail to stay there, often because they do not recertify annually, as currently required. US Department of Education data from 2013 and 2014 shows thatmore than half of borrowersin IDR plans were not recertified in time. For some borrowers, this may be intentional (perhaps they find a better paying job and/or want to avoid interest charges by repaying their loan faster). But many borrowers fail to recertify through carelessness or due to bureaucratic, technical, or legal recertification difficulties. For many borrowers, this results in increased required payments (sometimes increased direct debits from the borrower’s bank account, compounding of unpaid interest which increases total debt, and late payments which lengthen the life of the borrower. of the loan, and, by some, by default).
- Many borrowers find their IDR payment unaffordable. The current formula protects a borrower’s income up to 150% of the federal poverty level and fixes monthly payments up to 10% of the “discretionary income above this level. The formula for setting IDR monthly payments reflects income and family size, but not regional differences in the cost of living or other expenses a borrower may have. Because individuals file taxes based on the previous year’s income, the federal government has no real-time measure of income or employment, so payments are based on the income of the previous year. If a borrower is going through a difficult time, such as losing their job, it is the borrower’s responsibility to update their income. Several of the recommendations for the previous problem were also offered to address affordability.
- No matter how well-intentioned the IDR is, its success depends on how it is administered. Borrowers generally do not deal directly with the federal government, but with service agents hired by the government to deal with borrowers. Errors and abuses of service as well as Ministry of Education policies often prevent borrowers from accessing the full benefits of IDR. For example, loss of documents can lead to delays in IDR processing and loss of payments eligible for reversal. Many borrowers say managers either did not alert informed them of the existence of the IDR and/or encouraged them to register for abstentionand adjournment which may not entitle the IDR to be cancelled. This causes loan balances to increase (interest continues to accrue and is capitalized) and prevents a borrower from accumulating months that could have counted towards the 25-year forgiveness threshold. This partly reflects Ministry of Education guidelines for repairers; the GAO found that the department “instructions and guidance to loan servicers are sometimes lacking, resulting in inconsistent and inefficient services for borrowers.”
- Many IDR borrowers do not make large enough payments to cover accrued interest, so they see their balances increase over time. Even though their balances may eventually be forgiven, rising balances are, to say the least, discouraging to borrowers making the required monthly payments and can tarnish borrowers’ credit reports. In contrast, borrowers in fixed payment plans see their balances decline over time. In some repayment plans, the government subsidizes interest to reduce or eliminate this problem. For example, for eligible loans under REPAYEthe government pays 100% interest for the first 36 payments in which a borrower’s payments do not cover interest, and then the government subsidizes 50% interest on any subsequent payments.
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