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Fixing Income-Driven Repayment Could Be Major Part of Student Loan Reform

By Owen Daugherty, NASFAA Staff Reporter

Related topics in the Ref Desk: Income-Based Repayment Plan 

Left-leaning Democrats and advocacy groups have been increasingly calling on the Biden administration to cancel student loan debt. While many have said the president has the authority to do so with the flick of a pen, a more nuanced conversation among policy wonks is emerging. 

Although many agree something needs to be done to help alleviate debt for certain borrowers, experts have also pointed out the need to ensure future borrowers are not left out of the picture. And moving forward, that effort could — and some say, should — include reforming the federal student loan system as a whole, including income-driven repayment (IDR) plans.

Many are arguing that the best way to administer student debt relief is through reforming the current IDR program, an idea President Joe Biden supported during his presidential campaign. While there is some agreement that IDR can be part of the solution going forward and there is consensus that the plans as currently constituted need to be fixed, there is less agreement on how to do so. 

Part of the problem, experts say, is that borrowers who leave school with debt don’t understand the variety of options available to them, with five different IDR plans making it all the more confusing for those seeking to enroll.

Currently, borrowers can enroll in one of those IDR plans and make payments based on a fixed percentage of their incomes, ranging from 10% to 20%. After anywhere from 10 to 25 years of monthly payments, borrowers can be eligible to have the remainder of their loan balance forgiven.

Biden campaigned on proposals to cancel $10,000 of federal student loan debt for each borrower and make changes to the current IDR plans, namely limiting monthly payments for federal student loans to 5% of discretionary income for anyone earning more than $25,000. Borrowers making less than $25,000 wouldn’t have to make any payments and interest would not accrue on their debt. After 20 years of payments, borrowers would have the remainder of the loans forgiven, and would not pay income tax on the forgiven portion, a major hang-up of current plans.

While IDR plans have bipartisan support for assisting borrowers to avoid default and continue making payments, many agree that they have historically been underutilized — though enrollment has increased in recent years due to federal outreach efforts — since borrowers often don’t know about the options. What’s more, some argue the plans contain flaws that create unnecessary obstacles for borrowers, such as annual income recertification and burdensome documentation processes. 

Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, argues the entire program is broken and isn’t working for borrowers. 

“The problem is that the existing programs … they failed,” she said on a recent episode of “Off the Cuff”. “These programs have been completely underutilized since their inception. … We have been failing at this program for 26 years.”

Citing the fact that only 32 borrowers have had their loans forgiven under IDR plans in the five years in which they have theoretically been eligible, according to a public records request, Yu said IDR in its current form is not the solution to the student debt dilemma the country currently faces.

“We’ve been trying to make [IDR] work,” she said. “We’ve known about underutilization about IDR for a long time and it's actually gotten better … but it is not at full utilization and we’ve never gotten there.”

About 45% of the volume of federal loans was being repaid through IDR plans in 2017, a significant jump from 12% in 2010, according to a report from the Congressional Budget Office (CBO) released before the pandemic. However, less than 20% of borrowers with federal loans are enrolled in an IDR plan, Federal Student Aid’s portfolio shows, though the program’s popularity among borrowers was growing even before the pandemic led to an economic downturn.

Further, research has shown racial and socioeconomic disparities exist regarding which borrowers are able to access IDR plans. “These borrowers are regularly given bad guidance about their repayment options or no guidance at all, and they are frequently driven into costlier options like forbearance,” the Student Borrower Protection Center wrote in a November 2020 report. 

Beth Akers, a resident fellow at the American Enterprise Institute, said what was once a universal safety net for borrowers has actually devolved into a complex set of repayment plans with different eligibility and benefit parameters, forcing students to navigate the number of options in front of them, choose the one that's right for them, and then elect to enroll (and recertify annually), all while dealing with a slew of sources of information ranging from their financial aid office to their servicer.

Since the IDR plans have been changed and expanded over the years, what exists now is a “mishmash program” of various plans that theoretically should work, but is falling short for borrowers. “It's sort of a mess,” Akers said.

“When there's a large burden on consumers to figure out how things work, or navigate a complex system, they sometimes aren't able to take advantage of the benefits that are fully available to them,” Akers said.

Akers and others say the current system that puts the onus on borrowers to research and opt-in to an IDR plan simply isn’t working, but argue that the system — with fixes — can still perform its intended purpose.

“If I could wave a magic wand and redesign the program, I would make a single IDR program where payments are automatically set based on income through some sort of connection with the IRS so that students could effortlessly repay their loans based on how much value they get out of their school,” Akers said, pointing to how Australia handles student loan repayments as an example. 

While there is some agreement that a single plan would remove complexities, there is debate within the higher education community on the variables regarding how the plan should be constructed, and even less consensus within the halls of Congress.

Michele Streeter, a senior policy analyst at the Institute for College Access and Success (TICAS), said she’d ideally like to see Congress simplify the IDR program as part of a Higher Education Act (HEA) reauthorization.

If Congress isn’t able to tackle an HEA rewrite in the coming years, she said the Department of Education (ED) could look to create a new IDR plan through a negotiated rulemaking session or via executive authority, though each of those options comes with its own set of obstacles and is partly how the system became what it is today, with ED addeding plans over the years rather than tackling wholesale reform.

In a memo to the Biden administration outlining priorities for the new White House and ED, TICAS noted the importance of simplifying the repayment system for borrowers.

TICAS has also published a comparison of all the various proposals to modify the IDR program, analyzing a handful of variables such as what percentage of a borrower’s income their monthly payment should be, how long borrowers should make payments until the remainder of their debt is forgiven, and whether forgiven debt should be treated as taxable income — expected to be a moot point after Senate Democrats added a provision to the latest coronavirus relief bill that would exempt any amount of forgiven student loan debt from federal taxes for five years.

Streeter pointed to a significant amount of common ground among the proposals, notably wanting IDR plans to be an option for borrowers as opposed to mandated, remaining available to all borrowers with federal loans regardless of their debt-to-income ratio, and giving borrowers enrolled in IDR the option for automatic annual income certification to remain enrolled.

NASFAA supports simplifying the IDR program, noting that consolidating the existing plans into one will help borrowers understand the benefits and protections available to them under the federal student loan repayment system.

“It's obviously complex for students. But also it's just a lot for aid administrators to keep up with as well,” said Megan Coval, NASFAA’s vice president of policy and federal relations, adding that aid administrators are often the ones explaining the complexities of the various plans to students. 

Along with reducing the number of plans, NASFAA is also working on a memo outlining a simplified IDR plan with terms and conditions that would best benefit borrowers.

Beyond sorting out the web of repayment options that leaves too many borrowers confused and less likely to understand the merits and drawbacks of each, Streeter noted that reforming the program would go a long way, but still would not alleviate all the issues that plague the student loan landscape. 

“I don't want it to take on this outsized role of saying, ‘Oh, that's the only thing we need to fix and then we're fine,’” Streeter said. “IDR is one really important piece of the puzzle, but it is not the solution to the college affordability crisis. It's an important part, but it’s not the be-all and end-all.”

 

Publication Date: 3/10/2021


David S | 3/10/2021 1:7:59 PM

Throw in the recent report from the National Consumer Law Center that of what they say are 2 million+ borrowers eligible for IDR-driven loan forgiveness (20+ years of repayment), a grand total of 32 borrowers - that's not a typo, thirty two - have had their loans forgiven, and it's really hard to argue that many things about student loan repayment are working they way they're supposed to.

The time for tweaking things around the edges is over. We need serious structural reform.

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