Research advocates fixes to income-tested reimbursement

Two recent reports highlight the need to reform income-driven plans to repay student loans, as the repayment pause ends early next year and the Department of Education seeks to create a new plan by through the regulatory process.

Among borrowers in repayment in the Education Trust’s study of how black borrowers experience student loans, 72% were enrolled in an income-based repayment plan, or IDR. These borrowers described the IDR as something akin to a “lifetime debt sentence,” said the report, which was based on a nationwide survey of nearly 1,300 black borrowers and in-depth interviews with 100 black borrowers. .

“Borrowers often felt like they were making payments with no end in sight, and this was compounded by other financial debt – payday loans, housing debt, car debt, or credit card debt. credit,” said Jalil Bishop, co-author of the report. . “They feel like education was supposed to give them the resources and the opportunity to get ahead of that debt, but student loans have become a place where that debt escalates.”

The Department of Education offers four IDR plans for federal student loan repayment that are supposed to make borrowers’ monthly payments more affordable based on their income and family size. Each plan has a different repayment period, but they generally last between 20 and 25 years. Borrowers must also recertify their income and family size each year so that their loan officer can recalculate their payment. At the end of the repayment period, any remaining loan balance is canceled.

In theory, the IDR is supposed to help borrowers live a more comfortable life while paying off their debt. But that’s not happening in reality, especially for black borrowers, said Victoria Jackson, deputy director of higher education policy at the Education Trust. For some borrowers, payments are still unaffordable – nearly a quarter of those surveyed said they struggled to pay rent, healthcare and food, and 71% said they could not afford one. savings account.

Borrowers reported that payments for IDR plans were so low that they only covered enough to avoid them in the event of default, but not enough to pay off their loan interest or principal. They often see their balance “ballooning,” Jackson said.

Most respondents – 80% – said they supported broad debt cancellation by the federal government, which Bishop said would help address “the history and pattern of mismanagement and poor design of student loan repayment plans”. But borrowers also want reforms to IDR plans that would allow them to see real progress toward their loan repayments — by subsidizing or eliminating interest — and plans that align with the original terms of their student loans.

“When people borrow student loans, the standard repayment plan is 10 years,” Bishop said. “A lot of borrowers couldn’t understand why they had signed up for these 20 and 25 year plans because when they borrowed the debt they thought it was something they could pay off soon after the loan. graduation.”

The department acknowledged many of these issues with IDR plans during the process of developing the negotiated rules, telling negotiators it would like to create a new IDR plan that addresses long repayment periods, accrual of interest , unaffordable payments and the number of plans with different conditions. . The challenges of having a variety of IDR plans were highlighted in the first negotiating session by Rachelle Feldman, associate provost and principal of the University of North Carolina at Chapel Hill, who serves as substitute negotiator representing public institutions of four years.

“I just want to make a real plea for there to be fewer lanes so it’s less confusing for everyone – not just our [Public Service Loan Forgiveness] borrowers, but our borrowers at all levels,” Feldman said.

Daniel Kreisman, an associate professor of economics at Georgia State University, agrees, saying in a recent report for Third Way that the department should narrow the options available for student loan repayment plans — not just within the university. ‘IDR, but for reimbursement plans in general.

Borrowers are automatically enrolled in standard “fixed” repayment plans, which result in the highest default rates, Kreisman wrote. IDR plans might offer a better fit for borrowers, but there are barriers to accessing them — having to contact their loan officer and constantly certifying their income — and many borrowers are unaware the option exists.

Kreisman conducted a lab experiment at Georgia State with 542 undergraduate students where pre-selected repayment plans were swapped between groups. When the standard repayment plan was the default, 63% of students chose it. But when the IDR plan was the default, only 34% chose to enroll in a standard reimbursement plan.

“The simple conclusion is that changing the default option can be a low-cost, high-reward lever for government — and for students,” Kreisman wrote. “Right now, the onus is on borrowers to navigate an overly complex repayment system. All the evidence points to this being a policy failure that is costing both students and taxpayers.

Kreisman said Inside Higher Education that he thinks having an IDR plan as the only plan – while giving borrowers the option to prepay – would help solve many of the problems that exist with IDR plans, such as the need to recertify income every year. Negotiators also raised concerns about the recertification process during the first negotiated rulemaking session, but they looked to more automation and data sharing between federal agencies as a potential solution.

IDR plans could help prevent many borrowers from defaulting when the repayment pause lifts on Jan. 31, 2022, Kreisman said. But the ministry won’t be able to resolve issues with the plans by then – they have yet to come up with regulatory text on IDR plans for negotiators to consider. Yet, given all that is happening in federal student aid, the reports’ findings are necessary for those contemplating reforms.

“I think now is a good time to understand the experience of black borrowers and what they want policymakers to do,” Jackson said.

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