From Eight Plans to Two: How the College Affordability Act Improves Student Loan Repayment
The current federal student loan repayment system is far too complex and is difficult to navigate for even the savviest of borrowers. There are currently eight repayment plans — five of which enable a borrower to make monthly payments based on their income — for which eligibility requirements, costs, and benefits vary. Even with the safety net of income-driven repayment options, in the last 12 months alone, more than one million borrowers entered default.
Like other proposals before it, the College Affordability Act (CAA) — House Democrats’ comprehensive proposal to reauthorize the Higher Education Act — makes major progress in improving the federal student loan repayment system. Below, we outline the major components of the new repayment system under the CAA, many of which align with longstanding TICAS recommendations. While there are some additional considerations we also highlight below, the CAA’s repayment proposal is a strong starting point for much-needed reform.
Most importantly, the bill streamlines the eight existing student loan repayment plans into two plans: a single, improved income-driven repayment (IDR) plan and one fixed repayment plan. Retaining these options will ensure all borrowers have a real choice between the benefits of consistent monthly payments over set period of time versus the benefits of having their monthly payments fluctuate with their income.
Upon entering repayment, all borrowers will be enrolled by default in the fixed plan, as they are today. All borrowers will then be able to opt into the single income-driven plan if they need to access more affordable monthly payments or just prefer to have their payments tied to their incomes. Borrowers can freely switch between the fixed plan and the income-driven plan over the course of their repayment period.
Fixed Payment Plan Proposed in CAA
A fixed repayment plan allows borrowers to repay the full balance of their loan with consistent monthly payments, similar to a mortgage. Under the CAA, all borrowers would be automatically enrolled in the fixed repayment plan. Borrowers with higher balances would be enrolled in longer repayment periods by default, but they could choose any of the shorter repayment schedules or choose to prepay their loans. Designing the fixed repayment plan this way consolidates three existing plan options — standard, extended, and graduated — for borrowers who prefer to make a consistent monthly payment over a set period of time, rather than enrolling in IDR.
Retaining some form of extended repayment periods based on balance may be especially important for borrowers with both high debts and high incomes. These borrowers can face very high monthly payments in both a 10-year fixed plan as well as in an IDR plan — especially with the standard payment cap eliminated and the income exclusion phased out (more on this later). Those borrowers may prefer, especially early in their career, to access a more affordable monthly payment by extending their fixed repayment period, even if it means taking longer to pay down their debt.
There is widespread agreement on the need to streamline the existing maze of repayment options, with most proposals landing on one fixed plan and one IDR plan, as is in the CAA. One alternative that is worth further consideration would be a move to three plans — a 10-year fixed plan into which all borrowers entering repayment are automatically enrolled (as they are today), with the option to enroll in either an extended fixed plan based on debt level or a single income-driven plan. This might nudge borrowers to more actively weigh the pros and cons of IDR against a lengthier fixed repayment in cases where the monthly payment under a 10-year fixed plan is unaffordable.
Income-Driven Plan Proposed in CAA
The CAA’s single income-driven repayment plan makes key improvements over the current array of income-driven options: it allows all borrowers to access the plan rather than requiring documentation of “financial hardship,” it caps monthly payments at 10 percent of discretionary income, and it provides forgiveness of remaining debt for all borrowers after 20 years of payments.
The plan also better targets debt forgiveness to those who need it most. First, it removes the “standard payment cap,” which caps a borrower’s monthly payment in an income-driven plan at the amount they would have paid if they elected to pay on a 10-year standard repayment plan. This means that in the current repayment system, some higher-income borrowers end up paying less than 10 percent of their income in an IDR plan, while lower-income borrowers still pay the full 10 percent of their income.
The CAA also phases out the income exclusion for higher-income borrowers. Currently, a portion of a borrower’s income is excluded from consideration when their monthly IDR payment is calculated. The CAA phases out this exclusion for single borrowers earning more than $80,000 per year and married borrowers earning more than $160,000 per year. Except for some households with higher incomes, the CAA’s single IDR plan will offer payments that are as low, or lower, than what a borrower would pay under any of the five existing IDR plans.
The bill also includes several key provisions to simplify the process of enrolling and staying enrolled in income-driven repayment.
• First, the bill allows for written, electronic, or verbal enrollment in IDR, which will make it easier for borrowers to enroll and quickly access a more affordable monthly payment.
• Second, the CAA includes a crucial provision to automate the re-enrollment process that borrowers must currently complete annually to continue accessing income-based payments. Under this automated process, borrowers will no longer be required to proactively submit new income information every year and risk losing their more affordable income-based monthly payment if they forget or if their forms are not processed properly.
• Third, the bill will automatically enroll delinquent borrowers in IDR to help distressed borrowers better avoid default.
It is important to note that the mechanism needed to make the above changes work — a secure data-sharing partnership between the Education and Treasury Departments — is not included in the bill. Without it, borrowers will still need to proactively re-enroll annually — a cumbersome process that currently trips up many borrowers and makes it difficult to stay enrolled in a more affordable plan.
In addition, while the CAA includes the interest subsidy available in some current income-based plans — in which the federal government covers all unpaid accrued interest for subsidized loans for up to three years — we recommend additional provisions to restrain interest accumulation in IDR. Capping the accrual of unpaid interest for borrowers with negatively amortizing loans is a targeted benefit that helps minimize the growth of loan balances for borrowers with low incomes relative to their debt.
Transitioning to the New Repayment System
Under the CAA, new borrowers (those with loans made on or after July 1, 2021) will only have access to these two new plans. Existing borrowers (those in repayment on a loan made before July 1, 2021) will have the option of retaining their current plan or switching into one of the two new plans. Once a borrower switches into one of the new plans, they will be ineligible to switch back into an old plan.
To implement this transition, the bill requires the Education Secretary to hold a rulemaking to enact the above provisions and terminate eligibility for existing plans for new borrowers. The bill also includes a directive for the Education Department and the Consumer Financial Protection Bureau to undertake an information campaign to inform borrowers of the new repayment options and the benefits associated with switching into the new system.
Repayment periods for the current plethora of repayment plans can extend, in some cases, for several decades, and the Education Department and its contracted loan servicers will continue to be responsible for managing both the current repayment structure and the new one — thus undermining the key goal of simplification. The lingering existence of these “zombie” plans will put a strain on those managing the program and likely lead to continued complications for borrowers repaying under the current system for decades to come.
To address this, we recommend that the Secretary be authorized to provide borrowers an incentive — such as a slight interest rate reduction — to switch proactively into one of the new, simplified plans. Then, after a transitional period, existing plans should be fully terminated, and all borrowers who have not already switched should be automatically switched into one of the two new plans.
Congress Must Seize the Opportunity to Reform the Repayment System
There is broad bipartisan consensus on the basic tenants of how to design an improved repayment system, and the repayment provisions in the College Affordability Act are a strong starting point for reform as Congress works to reauthorize the Higher Education Act. We urge the House to bring the CAA to the floor and to work with the Senate to advance these past-due improvements to higher education financing for the benefit of students, borrowers, and taxpayers.