New Report Looks At Challenges Of IBR, Payroll Withholding
By Brittany Hackett, Communications Staff
Though there has been some support for automatic enrollment in income-based repayment (IBR) for student loan borrowers, policymakers and advocates have mixed feelings about using employer withholding, largely due to concerns about how such a tool would fit into the current design of IBR, according to a new report.
The report is the second in a series from a consortium that includes NASFAA, New America, and Young Invincibles, with the Urban Institute and the U.S. Chamber of Commerce Foundation serving as technical advisors. The consortium received funding for the paper from the Bill and Melinda Gates Foundation as part of its Reimagining Aid Design and Delivery (RADD) project.
In a previous paper, the consortium argued for automatic enrollment in IBR at a conceptual level, which it said could help decrease student loan default rates. The new paper takes that notion one step further, exploring the impact of coupling automatic IBR enrollment with payroll withholding, which has been raised as a possible mechanism of implementing automatic IBR.
However, there has been little previous research into the design of such a program, making it difficult to imagine how it would work in the current IBR system. Starting with the premise that the formula for IBR would look similar to its current state, the consortium examined the tradeoffs of a payroll withholding system and the issues that might arise if one were implemented.
To begin with, the consortium established two broad principles to guide the options surrounding payroll withholding. First, repayment under any withholding system could not be more difficult for the majority of borrowers than it is under the current system. And second, repayment under any such system would need to be passive or automatic in that a borrower would not need to manually send payments in each month or navigate an overly complex system to pay what is owed.
The paper outlined six technical hurdles to achieving such a system, including:
- How employers would know which employees held student loans and how much needs to be withheld;
- The need for such a system to rely on an annual reconciliation process to resolve under- or over-payments each year;
- The impact on borrowers who earn income outside of a payroll system and the need for additional steps to address these borrowers;
- How to address borrowers with multiple jobs or those who are married to a spouse who earns income but does not have student loans;
- Whether to exclude some sources of a borrower’s income from loan payments like spousal earnings or investment income, which can result in less equitable repayments and incentivize non-reporting of income; and
- The need for much of the current loan system to operate alongside a payroll withholding system to allow for an opt-out feature, tasks related to loan origination, and benefits like deferment or forbearance.
While there was some disagreement among the consortium and the policy partners, the conversation “highlight[ed] the fact that [payroll withholding] is more complicated than often presented, and that the tradeoffs involved are real and difficult,” according to the report. In addition, “many of the biggest hurdles involved in implementing automatic IBR have to do with how IBR is currently designed, and so the path forward may involve tailoring a new IBR program that better matches the complexities of employer withholding,” the report noted.
NASFAA continues to be supportive of further exploring the the concept of auto-IBR and employer withholding, and recently offered support for the Earnings Contingent Education Loans (EXCEL) Act. As reauthorization approaches, NASFAA will stay engaged in discussions and proposals surrounding this concept in order to find a workable solution that helps to simplify repayments for students.
Publication Date: 10/30/2015
Helen F | 10/30/2015 6:57:16 PM
David S, have a look at REPAYE, which should be a viable option to address the current gaps in IBR that you identified.
David S | 10/30/2015 12:25:01 PM
...oops, my first sentence should have said "student loan repayment through payroll withholding..." My bad. Long week.
David S | 10/30/2015 12:19:38 PM
My feeling is that student loan repayment, with or without IBR, should be an opt-in, not automatic. Some borrowers might not want their employer to know about their student loans, and if this ever comes to fruition, it's hard to imagine it not including some sort of "businesses with fewer than x employees" exemption. This could be really burdensome at some little start-up with 4 employees.
Most of the 6 issues identified above as potential obstacles would be much easier to work with if loan repayment in general, and income-driven plans specifically, were less complicated. Let's start with IBR being available for everyone, regardless of income and regardless of debt, that way multiple jobs or additional sources of income, including a spouse's income, wouldn't matter. Lots of larger employers outsource payroll functions, building some sort of interface between payroll service providers and NSLDS shouldn't be all that difficult.
I believe that payroll withholding is the standard way to repay student loans elsewhere (Australia and NZ if I'm not mistaken). If they can figure out how to make it work, we should be able to.
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