Blog Post | September 29, 2021

Roadmap for Reform: Making Income-Driven Repayment Work Better for Borrowers

Affordability Student Aid

With over 8.5 million borrowers currently enrolled, income-driven repayment (IDR) plans have become a critical safety net for student loan borrowers since the first widely available plan was created in 2007. For many borrowers, the monthly payment amount they would be required to make under a standard repayment plan is too high. IDR plans address this by allowing borrowers to instead make monthly payments in an amount based on their income and family size.  

Because these lower monthly payments can extend a borrower’s repayment term, IDR plans also provide a key protection: a light at the end of the tunnel. Instead of requiring borrowers to pay off their loans in full (regardless of how long it would take), IDR plans discharge any debt that remains after a set number of income-based monthly payments (20 or 25 years’ worth, depending on the plan).  

Many borrowers enrolled in IDR will repay their loans in full within the 20–25-year repayment window and therefore will not have any debt discharged. However, IDR is still a key safety net for such borrowers, as it enables them to manage their loans and stay out of default, which may not have been possible had they been required to make higher monthly payments under a standard plan. Research shows that borrowers enrolled in an IDR plan default at much lower rates than those in non-IDR plans. Without IDR, millions of borrowers would face even deeper struggles in managing their student loan debt.  

TICAS has long advocated for this critical program: we helped to design the first widely available income-driven plan (called income-based repayment, or IBR), and have provided deep analysis and technical advice for each successive version.

TICAS calculations using FSA Data Center data on Direct Loan Portfolio by Repayment Plan, updated on September 30, 2020

 

 

What Needs to Change 

Despite the availability of IDR plans—and significant improvements to program design and generosity over time—too many borrowers continue to struggle with repayment, with some even defaulting despite being enrolled in IDR.  

One-quarter (25%) of all Direct Loan borrowers were either delinquent or in default at the end of 2019; over a million Direct Loan borrowers entered default in 2019 alone. Too many of these borrowers are never making it into IDR, and even for some who do, income-based payments can still be too high. Borrowers also struggle to navigate the bureaucratic hurdles of enrolling in and staying enrolled in IDR plans. Students from low-income households, Black and Latina/o students, students who do not complete their programs, and students who attend for-profit colleges are disproportionately likely to borrow to attend school and to struggle to repay that debt.   

 Also, many enrollees who are making regular IDR payments still struggle with negative amortization if their monthly payments are not enough to cover accruing interest. As a result, their balance balloon, even as they make regular payments. This is financially damaging and psychologically discouraging for the borrower and undermines IDR’s effectiveness.   

For IDR to better protect borrowers from unaffordable payments, keep borrowers out of default, and provide a reliable light at the end of the tunnel for debt that does not pay off, policymakers must make significant reforms to IDR design and implementation. The good news is that there is broad consensus on how to make these changes. 

What Policymakers Can Do 

This fall, the U.S. Department of Education is undergoing a negotiated rulemaking process that is widely expected to result in another new IDR plan. In creating such a plan, the Department must address both bureaucratic hurdles and broader design flaws by creating a more generous, fairer, and simpler plan that builds from and improves upon the existing REPAYE plan (the newest IDR plan that was created during the 2015 negotiated rulemaking process). 

This new plan must:  

  • Better address the needs of borrowers who historically have struggled with repayment 
  • Be easy for borrowers to access and understand
  • Revise the formula for determining monthly payment amounts to make IDR payments more affordable for economically distressed borrowers; 
  • Prevent ballooning balances by restraining interest accumulation and ending all instances of interest capitalization for borrowers enrolled in IDR; and   
  • Provide real and automatic relief after a reasonable number of payments. 

In addition, whether via regulatory action or legislation, policymakers must strengthen IDR further by: 

  • Ensuring that borrowers reliably receive automatic IDR forgiveness when they become eligible; 
  • Permanently ending the taxation of all discharged student debt;  
  • Automatically enrolling struggling borrowers into IDR to prevent defaults;  
  • Automating the enrollment and renewal processes to make IDR easier to access; and
  • Better aligning servicer incentives to help borrowers access IDR and provide strong servicer oversight. 

Additional Reforms Are Needed to Make College Affordable & Reduce Reliance on Debt  

While IDR plans are a critical safety net for borrowers, they are not a silver bullet. Even the most well-designed, well-functioning IDR program cannot compensate for the broader structural issues that students face in covering college costs, including stagnant wages, long-term declines in state funding for public colleges, and a Pell Grant that covers the lowest share of college costs in the program’s history. It is also not a substitute for one-time debt cancellation, should policymakers determine such a step is warranted.  

Further Reading