Income-driven repayment (IDR) plans provide a critical safeguard for borrowers but can be confusing for borrowers to navigate. Current delinquency and default rates suggest more borrowers who could benefit from IDR are not enrolled.
Simplify and Improve Income-Driven Repayment (IDR)
There are five similar IDR plans, causing unnecessary complexity and confusion. To simplify and improve student loan repayment as well as reduce delinquency and default, we recommend streamlining these five plans into a single, improved plan that works better for both students and taxpayers.
This single IDR plan, paired with the option of a fixed payment plan, would let any borrower choose the assurance of payments capped at 10 percent of income and provide tax-free forgiveness of remaining debt, if any, after 20 years of payments. The plan would also better target benefits to those who need them most and prevent borrowers with high incomes and high debt from receiving loan forgiveness when they could have afforded to pay more.
We strongly support legislation introduced in the Senate (S. 1002) in 2019 that reflects these recommendations (see TICAS fact sheet here). Many of these recommendations are also included in legislation (H.R. 4674) introduced in the House in 2019.
Automatically Enroll Distressed Borrowers in IDR
While it is important that borrowers have a choice between a fixed repayment option and an income-based repayment option, borrowers who are severely delinquent on their loans should be automatically enrolled in income-driven repayment to help them avoid the severe consequences of defaulting on their loans. IDR is always preferable to default, and IDR payments can be as little as $0 for borrowers with very low incomes.
We strongly support bipartisan legislation (H.R. 3883) introduced in 2019 that would automatically enroll severely delinquent borrowers in an income-driven plan to help prevent defaults.
Improve Student Loan Servicing
Improving the federal student loan servicing system will significantly improve borrowers’ repayment experiences and outcomes. As the Department continues developing its new servicing platform (NextGen), the Department must ensure that the new system is transparent to borrowers, that contractors’ incentives are aligned with borrower success, and that contractors are subject to strong oversight.
As has been jointly recommended by the Consumer Financial Protection Bureau (CFPB) and the Departments of Education and Treasury — and separately recommended by the Government Accountability Office — a federal servicing system must prioritize borrowers’ interests and ensure all borrowers have easy access to high-quality information and excellent customer service. We also support the restoration of a data-sharing partnership between the Education Department and the CFPB to facilitate appropriate oversight of the federal loan program.
Restore Bankruptcy Protections for Student Loan Borrowers
Bankruptcy provides a crucial protection for Americans facing severe financial hardship. The bankruptcy reform legislation passed in 2005 sets a high bar for granting relief, which helps ensure that consumers who receive relief are truly unable to pay. Yet federal bankruptcy law treats private education loans and federal student loans even more stringently than other forms of consumer debt, excluding both from discharge except in exceedingly rare cases of proven “undue hardship.”
To remove barriers to relief for borrowers who are truly unable to repay, we support bipartisan legislation (H.R. 770, S. 1414 and H.R. 2648) to restore borrowers’ ability to discharge student debt through bankruptcy.
Ensure the Consequences of Student Loan Default Are Not Overly Punitive
In addition to streamlining and improving the student loan repayment system, we recommend that policymakers re-think some of the consequences of student loan default and ensure that they are not overly punitive and self-defeating.
Federal student loan borrowers can resolve their default through several avenues, including full repayment, loan rehabilitation, or loan consolidation. While each of these three options remove the default status from loans, only borrowers who complete the loan rehabilitation process have the record of default removed from their credit history. A record of default on a borrower’s credit history can have a severe and long-lasting impact on their financial situation, and all borrowers who have resolved their default — regardless of the path to resolution they took — should have access to the same fresh start. We recommend that the default record also be removed from the credit history of borrowers who resolve their default loan through repayment or consolidation, and support legislation introduced in 2019 (H.R. 4869 and H.R. 4395) that would address this issue.
In addition, some of the consequences of default can themselves compound financial hardships, making it more difficult for borrowers to resolve default and establish financial stability.
We support bipartisan legislation re-introduced in 2019 (S.609) that would end the practice of states suspending, revoking, or denying state licenses solely because borrowers are behind on their federal student loan payments.
Borrowers with defaulted loans can also have their wages or tax refunds garnished by the U.S. Department of the Treasury through its Treasury Offset Program (TOP), often causing financial hardship for those who can least afford it. We recommend that offsets be capped at a reasonable level for all borrowers and that certain low-income borrowers be exempted from TOP collections.
When a borrower makes payments to collection agency on a defaulted student loan, a sizeable portion of their payment is typically applied to collection fees, which can be as high as 40 percent on some loans. We recommend that policymakers implement a low statutory cap on the collection fees that private collection agencies can charge to borrowers with defaulted student loans.