As lawmakers and researchers continue to search for a more comprehensive way to measure borrower success and hold institutions accountable, authors of a recent study highlighted a tension between balance-based repayment rates — an increasingly popular idea to replace cohort default rates (CDRs) — and the growing enrollment in income-driven repayment (IDR) plans.
This disconnect is important to recognize at this point in time, said Johnathan Conzelmann, a research education analyst at RTI International, as policymakers reauthorizing the Higher Education Act (HEA) consider using repayment rates to hold insitutitions accountable for how well student loan borrowers fare after leaving school.
"I think we're talking about this at the right time," Conzelmann said.
In the study "Another Day Another Dollar Metric? An Event History Analysis of Student Loan Repayment," Conzelmann and co-authors Austin Lacy and Nichole Smith demonstrated that repayment rates measuring balance reduction may not be an appropriate metric when looking at the entire student loan borrower population, taking into account borrowers in both IDR and standard, fixed plans.
IDR and fixed plans have "contrasting goals and structures," the authors wrote.
While IDR plans cap monthly payments as a percentage of the borrower's income for up to 25 years, fixed plans set monthly payments by calculating the amount needed to repay the loan in 10 years, making those in standard plans more likely to pay down their principal balances more quickly.
During the Obama administration, ED officials made a concerted effort to encourage increased enrollment in IDR plans as a way to protect struggling borrowers. In just a few years, enrollment surged. As of December 2015, about 4.6 million Direct Loan borrowers were enrolled in IDR plans, but by September 2017, that number had increased to 6.8 million, a nearly 50 percent increase.
In 2015, the Obama administration released the College Scorecard to help students analyze student loan debt when making decisions about where to attend college. The tool uses the "dollar-down" metric, which measures the percentage of borrowers who paid down at least $1 of their principal student loan balance after one, three, five, and seven years.
By design, IDR's structure of smaller monthly payments over a longer period of time prolongs the process of paying off the principal loan amount. Even if a borrower in IDR makes all of their monthly payments, the dollar-down metric views them negatively.
The authors found that borrowers in IDR plans took approximately two years longer to pay down 5 percent and 10 percent of their principal balance than did borrowers in a standard repayment plan.
Moreover, borrowers enrolled in IDR plans were 67 percent less likely to repay any principal balance, compared to borrowers not enrolled in IDR.
The authors suggested implementing a "more dynamic," time-centered metric, whereby borrowers would be evaluated on adherence to their personal repayment schedule.
By this measure, borrowers in IDR could be could be counted positively in a repayment rate metric, just as borrowers who meet higher monthly payments in fixed plans are counted in a "dollar-down" measure.
"Any repayment rate created that can apply to both standard [borrowers] and folks on IDR is something we should shoot for," Conzelmann said.
Under the PROSPER Act, programs with repayment rates of less than 45 percent for three consecutive fiscal years would lose eligibility for Title IV financial aid for three years. Borrowers would be considered in "positive repayment status" if their loans are less than 90 days delinquent, repaid in full, or in deferment or forbearance two years after entering repayment.
Another provision, supported by NASFAA, proposes streamlining IDR plans to make the process of choosing and remaining in a plan less complicated for borrowers.
The authors in the study were unable to observe how borrowers in IDR compared to those in standard plans over an extended period of time, since the students in their dataset completed bachelor’s degrees in 2007-08 and were only observed in repayment through 2012.
"That just comes with time," Conzelmann said.
Publication Date: 6/13/2018