As student loan borrowers brace for the return to repayment, a new policy brief seeks to highlight how greater utilization of the federal government’s existing income-driven repayment plans (IDRs) would help prevent defaults.
Daniel Kreisman, an associate professor at Georgia State University, in a recent paper helped demonstrate how changing the default repayment plan for all borrowers to IDR — and completely eliminating the option of the standard 10-year repayment plan — could provide stronger protections to borrowers with better financial outcomes on student loan repayment. In order to achieve this goal, policymakers would need to make a number of changes to the loan system.
In the policy brief, Kreisman outlined the ways in which the current system has become convoluted for borrowers who are offered an assortment of loan repayment plans. Among them are the standard, graduated, extended, income-based repayment (IBR), income-contingent repayment (ICR), Pay As You Earn (PAYE), and REPAYE plans.
While borrowers navigate their employment options and figure out their finances after graduating, their situation could easily change due to shifting economic realities or new career opportunities, yet switching to a repayment plan that might offer stronger protections has many obstacles.
“To change out of the Standard plan, borrowers have to affirmatively contact their servicer, and to enroll in an IDR plan, borrowers have to show proof of earnings, which then need to be recertified every single year,” Kreisman wrote. “These hurdles simply deter borrowers from enrolling in a plan that benefits both them and taxpayers.”
In order to demonstrate how to incentivize more borrowers to utilize IDR, Kreisman ran an exit counseling experiment with 542 undergraduates from Georgia State University where a subset of students had their default repayment option changed from Standard to REPAYE (the most current IDR plan).
In the experiment, the same repayment plans remained available. Students “could choose an IDR plan, like REPAYE, in which they might take longer to repay and accrue additional interest but also get insurance protecting them from a costly default, or they could choose a fixed repayment plan, like the Standard plan, in which they repay quicker if they ‘earn’ a lot, but they also face the risk of default with no protections,” he wrote.
According to the paper, the control group, which got the exit counseling as it is for actual borrowers, chose the standard plan in about the same proportion as students do in the real world: 63%. But for the group that had nothing changed other than which plan was pre-selected for them, only 34% chose standard.
“Simply switching the default to an IDR plan nearly halved the share of people choosing the Standard plan (a 46% reduction),” Kreisman wrote. “More, only 7% chose REPAYE when Standard was the pre-selected option, while 32% chose it when we simply switched the default to REPAYE for them.”
In terms of recommendations, Kreisman suggests making IDR the only repayment option for borrowers, which will enable the government to better target needed aid and would make borrowing for college less risky for students since balances would be forgiven after 25 years of the repayment period.
Under this single repayment plan, policymakers should also offer the option to pre-pay loan balances at any time to benefit borrowers looking to shorten the timeframe of repayment.
“The benefit of IDR over other proposals, like ‘free’ college, is that those who can afford to pay do, and those who can’t don’t,” Kreisman wrote. “As such, it offers a more sensible approach than the current plan, which makes everyone pay regardless of means or the alternative of ‘free’ college, which would make higher education no-cost even for those who could afford it.”
Further, the IDR program would need to make repayments automatic through payroll withholding by linking loan information from the Department of Education (ED) to the Department of the Treasury, which would remove the need for borrowers to annually certify their income to stay enrolled in IDR.
While this cross-departmental data sharing seems like an easy fix, it would likely need to be approved by Congress. During ED’s most recent negotiated rulemaking session, the agency’s general counsel indicated that accessing certain student data held by other agencies, like the Internal Revenue Service (IRS), would require congressional approval.
On the student loan repayment landscape, NASFAA has advocated for a number of reforms to the Higher Education Act (HEA), specifically calling for simplifying federal loan repayment plans, as well as strengthening the Public Service Loan Forgiveness (PSLF) program.
NASFAA has also explored how automatic enrollment in IDR plans for student loan borrowers could help decrease student loan default rates and continues to be supportive of further exploring the concept of auto-IDR and employer withholding.
“All the evidence we have suggests that if we do this, student loan defaults will go down, and repayments to the government will go up,” Kreisman wrote. “The rare policy win-win.”
Publication Date: 10/18/2021