Problems and options for dealing with them

The Hutchins Center on Fiscal & Monetary Policy and the Student Loan Borrower Assistance Project at the National Consumer Law Center organized a series of non-record dialogues in 2021 on student loans between individuals with significantly different views on the nature of the problem and the best prospective solution. The conversations, moderated by Convergence Center for Policy Resolution, did not intend to reach a consensus and did not. However, the recent focus on income-based repayment as a way to alleviate the burden on student loan borrowers following the expiration of the COVID student loan repayment moratorium – including proposals made by President Biden and Department of Education – led two of the senators to write this discussion on some issues in IDR and the pros and cons of some frequently mentioned solutions. This essay does not represent the views of Brookings or the NCLC, nor does it represent the views of the participants in the Convergence Dialogue, although it has benefited from the input of some of them.

Unlike most other loans, the borrower’s ability to repay is not taken into account when taking out a student loan. Repayment based on income was designed to protect student borrowers from financial hardship – to insure borrowers against the risk that their education will not pay off in the form of higher salaries. (It was also seen by some as a way to help low-paid career borrowers.) Although the details have changed significantly over the years, the basic plan is simple: Pay a percentage of your monthly income above a certain limit for some number of years – possibly zero payments in some months – and you are entitled to receive forgiveness of any outstanding balance after a period, usually longer than the standard 10-year loan repayment period. About one in three student borrowers whose loan comes directly from the government, known as direct borrowers, is registered in some form of IDR, according to data from the Ministry of Education.

The debate over income-based repayment dates back to at least the 1950s, and Congress launched a pilot program in 1992. The report, “Income-Based Student Loan Repayment: Problems and Options,” summarizes IDR’s evolution in past three decades. It also identifies problems with IDR and the advantages and disadvantages of the solutions offered to address them, such as:

  • Few borrowers have historically used IDR, including some that would likely qualify for reduced payments and final forgiveness. Many borrowers never learn about IDR and, while federal loan agreements with servers have improved, IDR is bureaucratically difficult and servers have not always been motivated to enroll borrowers in IDR.
  • Borrowers enrolling in IDR programs often fail to stay on them, many because they fail to re-certify each year as is currently required. US Department of Education data from 2013 and 2014 show thatmore than half of the borrowersin IDR plans were not re-certified in time. For some borrowers, this may be intentional (they may find a higher paying job and / or want to avoid the cost of interest by paying off their loan faster). However, many borrowers fail to reaffirm due to carelessness or due to bureaucratic, technical or legal difficulties in re-certification. For many borrowers, this leads to an increase in the required payments (sometimes an increase in automatic debits from the borrower’s bank account, capitalization of unpaid interest which increases the total debt and delays in payments that extend the life of the loan and, for some, default).
  • Many borrowers find that their IDR payment is not affordable. The current formula protects a borrower’s income of up to 150% of the federal poverty level and sets monthly payments at up to 10% ofoptional income »Above this level. The formula for determining monthly IDR payments reflects the income and size of the household, but not the regional differences in the cost of living or other expenses that a borrower may incur. Because individuals file taxes based on the previous year’s income, the federal government has no measure of income or real-time employment, so payments are based on the previous year’s income. If a borrower falls into difficult times, for example losing a job, it is up to the borrower to update his income. Many of the recommendations for the previous problem have also been proposed to address affordability.
  • No matter how well-intentioned IDR is, its success depends on how well it is administered. Borrowers generally do not deal directly with the federal government, but with servers hired by the government to deal with borrowers. Mistakes and abuse of service along with Ministry of Education policies often prevent borrowers from accessing all the benefits of IDR. For example, the loss of documents can lead to delays in IDR processing and the loss of eligible cancellation payments. Many borrowers say that servers either failed to notify for the existence of IDRs and / or encouraged them to sign up for toleranceand a deferral that may not qualify for IDR cancellation. This leads to increased loan balances (interest rates continue to accrue and capitalize) and prevents the borrower from accumulating months that could count towards the 25-year forgiveness limit. In part, this reflects the Ministry of Education’s instructions to officials. GAO found the Department “sometimes they lack instructions and guidance to loan managers, resulting in inconsistent and inefficient services to borrowers. »
  • Many IDR borrowers do not make large enough payments to cover accrued interest, so they see their balances increase over time. While their balances may eventually be forgiven, rising balances are, to say the least, discouraging for borrowers who make the required monthly payments and can limit borrowers’ credit reports. In contrast, borrowers in fixed payment programs see their balances diminish over time. In some repayment plans the government subsidizes interest to reduce or eliminate this problem. For example, for loans that meet the conditions for repaymentthe government pays 100% of the interest for the first 36 payments in which a borrower’s payments do not cover interest and then the government subsidizes 50% of the interest on any subsequent payments.

Download the full report here »

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