Income-Driven Repayment

Borrowers are now one step closer to having a more streamlined process to keep their federal student loan payments affordable. Currently, borrowers struggling with payments can enter repayment plans that base monthly payments on their income, but they are required to update their income information every year. More than half of borrowers miss the annual deadline and the consequences can be severe – unaffordable spikes in monthly payment amounts that increase their risk of delinquency and default, as well as interest capitalization that can add substantial costs.

For example, a single borrower with $25,000 in debt (6.8% interest rate) and $25,000 in adjusted gross income (AGI) would owe $60 a month under the Pay As You Earn (PAYE) plan, but would owe $288 a month – over four times more -- if he or she missed the income recertification deadline.

TICAS, along with bipartisan groups of lawmakers in both the House and the Senate, other advocates for students and consumers, higher education leaders, financial aid administrators, and loan servicers have all advocated to reduce the likelihood that borrowers end up in delinquency or default by automating the annual recertification process (what is commonly known as “multi-year consent”). In response, the U.S. Departments of Treasury and Education recently announced an agreement to allow borrowers to provide permission for their annual income to be updated automatically using their existing tax data. Borrowers will be able to revoke that permission at any time. The move received bipartisan praise.

Automating the annual recertification process is a common-sense improvement that will help borrowers stay on top of their student loan payments. This change will also reduce the paperwork burden on student loan servicers. Now, it is incumbent on the agencies to work together to promptly implement the agreement to make multiyear consent a reality for borrowers and servicers, and for Congress to ensure that they have sufficient funding to do so.

Soon to be reintroduced in the new Congress by Representatives Bonamici (D-OR) and Costello (R-PA), the bipartisan SIMPLE Act also takes aim at the cumbersome annual recertification process for borrowers enrolled in income-driven repayment plans. In addition to requiring that borrowers can have their income automatically updated each year, the bill would dramatically reduce defaults by automatically enrolling severely delinquent borrowers who have not made a payment in four months into an income-driven plan. With a record eight million federal student loan borrowers in default, and one in four borrowers either delinquent or in default, these common-sense measures are urgently needed.

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Last week the Government Accountability Office (GAO) released a report highlighting weaknesses in the Department of Education’s budget estimates for income-driven repayment (IDR) plans for federal student loans. The Department agrees with and is already working to implement many of the GAO’s recommended changes to its methodology, some of which will increase estimated costs, while others will decrease them.

Meanwhile, most of the media coverage of the report has focused on GAO’s projection that $108 billion of loan principal will end up being forgiven under IDR and Public Service Loan Forgiveness (PSLF) for loans taken out between 1995 and 2017. However, this does not mean those loans will cost taxpayers $108 billion. The amount of debt forgiven is only one part of the equation to determine the net cost of IDR plans to the federal government. A borrower can receive forgiveness in an IDR plan and still pay more in total than she would have under a different repayment plan.

Consider a borrower with $40,000 in federal loans and $40,000 in adjusted gross income (AGI) in her first year out of school. She would pay almost $8,000 more in total in the Pay As You Earn (PAYE) plan than in a 10-year fixed repayment plan ($57,000 versus $49,000), even though she would receive nearly $8,000 in forgiveness under PAYE.* The GAO recognizes this fact in their report, agreeing that “it is possible for the government still to generate income on loans with principal forgiven, particularly if borrower interest payments exceed forgiveness amounts.” (p. 50).

Ultimately, the cost of the federal student loan program is determined by comparing how much the government lends with the amount that borrowers pay back and the cost of administering the program. Doing this, analysis of CBO data reveals the government is actually making money from the federal student loan programs. In fact, CBO estimates savings of $81 billion from federal student loans over the next 10 years alone, even after accounting for increased enrollment in IDR plans.   

Access to affordable, income-driven payments and a light at the end of the tunnel are essential for borrowers in an era of rising college costs and student debt. The GAO reported last year that 83% of borrowers in PAYE earned $20,000 or less in annual income, and recommended that the Department increase outreach to help more struggling borrowers learn about and enroll in IDR plans. IDR provides real relief for borrowers and helps them stay on top of their payments. Data show that borrowers in IDR are less likely to default or become delinquent than borrowers in standard plans.

Nonetheless, while IDR helps ensure that federal student loan payments are affordable and helps prevent default, it neither reduces college costs nor ensures that students and taxpayers are getting value for their investment in college. More needs to be done to strengthen college accountability and reduce student debt. For example, students need better information on program costs and outcomes, and the gainful employment rule needs to be enforced to ensure taxpayers are not subsidizing career education programs that consistently leave students with debts they are unable to repay. You can read more about our national policy agenda to reduce the burden of student debt here

* Note: these calculations assume that the borrower is single, her AGI increases 4% a year, and the average interest rate on her loans is 6.8%. Total amounts paid and forgiven are adjusted for inflation.

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Today the Administration announced a multifaceted plan to protect and support student loan borrowers. The announcement includes commitments to improve loan counseling, institute clear servicing standards and disclosures, and to help more borrowers enroll in income-driven repayment plans.

Students should have the best information in the right format to make critical decisions about how to pay for college. Loan counseling can play an integral role in helping student loan borrowers make wise decisions and avoid delinquency and default. The Department of Education’s online loan counseling tools serve 6.5 million students a year, and the Administration’s plan to make improvements based on input from borrowers and other stakeholders will help more students make the choices that are right for them. For TICAS’ recommendations to improve loan counseling that do not require legislation, click here.

Student loan servicers are paid more than $800 million a year to help borrowers access the repayment options, protections, and benefits that come with federal loans. Yet even so, a record 7.9 million borrowers are in default, and there are more than two million federal student loan borrowers over 90 days delinquent. Servicing failures, exacerbated by a lack of standards and misaligned incentives, are widespread. Once implemented and enforced, the standards outlined by the Administration – as well as the commitment to seek input on them – will make a huge difference for borrowers.

Providing borrowers in repayment with better information at the right time is a clear-cut next step. The Consumer Financial Protection Bureau’s Payback Playbook would share personalized information with borrowers to improve their understanding of repayment options, a positive move in the right direction. For TICAS’ recommendations on student loan servicing, click here.

Strengthening servicing standards by fully implementing the Administration’s new Student Loan Borrower Rights would improve servicing for borrowers in the following ways: (1) ensure servicers provide accurate and actionable information; (2) establish a clear set of expectations for minimum requirements for communication and services with borrowers; and (3) hold servicers accountable to borrowers and taxpayers. And, when servicers fail to do the right thing, the Department’s forthcoming complaint system can help ensure that borrowers’ concerns are addressed and resolved. We have recommended that the complaint system be public and searchable, connected to the complaint systems used by other federal and state agencies, and made clearer and easier to use.

Lastly, a key part of ensuring that fewer borrowers default on their loans is boosting borrower awareness of repayment plans that tie monthly payments to income. Our Project on Student Debt developed the policy framework and led the campaign that resulted in enactment of the Income-Based Repayment (IBR) plan, which has been available to borrowers since 2009. The Administration announced a new goal today to enroll two million more borrowers into income-driven plans like IBR. Although income-driven repayment is not the best choice for every borrower, clearly many more borrowers could benefit from tying their monthly payments to an affordable share of their income and knowing that they will not be repaying their student loans for the rest of their lives. The Debt Challenge, the Administration’s campaign to promote employer outreach and boost awareness of repayment options, will help even more borrowers make better informed repayment decisions. We will do our part to get the word out by contacting more than 100,000 subscribers to our website, IBRinfo.org, and sharing information with our Twitter followers and Facebook friends to remind them about income-driven repayment plans.

As the Administration moves forward on taking action to help borrowers manage student debt, we look forward to seeing these steps, tools, and standards put in place so that fewer borrowers end up delinquent or in default.

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