Research argues for fixes to income-based repayment
Two recent reports point to the need to reform income-driven plans to repay student loans as the repayment pause ends early next year and the Education Department seeks to create a new plan through regulatory process.
Of those borrowers in repayment in the Education Trust 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 conviction,” said The report, which was based on a national 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 debts – payday loans or real estate debts, car debts or credit card debts. credit, ”said Jalil Bishop, co-author of the report. . “They feel that education was supposed to give them the resources and the ability to anticipate these debts, but student loans have become a place where this 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 payback period, but they typically 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 written off.
In theory, IDR is supposed to help borrowers live more comfortable lives while they pay off their debt. But that’s not what happens 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 polled said they had trouble paying their rent, health care and food, and 71% said they couldn’t afford a savings account.
Borrowers reported that payments for IDR plans were so low that they only covered enough to keep them from defaulting, but not enough to pay off interest or principal on their loan. They often see their balance “skyrocket,” Jackson said.
Most respondents – 80 percent – said they supported broad federal debt forgiveness, which Bishop said would help address “the history and pattern of mismanagement and mismanagement. design of student loan repayment plans “. But borrowers also want reforms to IDR plans that would see them see real progress in paying off their loans – 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. “Many borrowers didn’t understand why they signed up for these 20 and 25 year plans because when they borrowed the debt they thought it was something they could pay back soon after getting their debt. diploma. “
The Department recognised many of these issues with IDR plans during the negotiated rule-making process, indicating to negotiators that he would like to create a new IDR plan that deals with long repayment periods, accumulation of interest, unaffordable payments and the number of plans with different conditions. The challenges of having a variety of IDR plans were highlighted during the first negotiating session by Rachelle Feldman, vice president and director of the University of North Carolina at Chapel Hill, who serves as deputy negotiator representing public institutions. four years.
“I just want to make a real plea to have fewer paths so that it is less confusing for everyone – not just our [Public Service Loan Forgiveness] borrowers but our borrowers at all levels, ”Feldman said.
Daniel Kreisman, associate professor of economics at Georgia State University, agrees, saying in a recent report for Third Way that the department should reduce the options available for student loan repayment plans – not just within the IDR, but for repayment plans in general.
Borrowers are automatically enrolled in standard “fixed” repayment plans, which result in the highest default rates, Kreisman wrote. IDR plans might be more suitable for borrowers, but there are barriers to accessing them – having to contact their loan department and constantly certify their income – and many borrowers are unaware that this option exists.
Kreisman conducted a lab experiment in the state of Georgia with 542 undergraduates where preselected repayment plans were exchanged between groups. When the standard repayment plan was the default repayment plan, 63 percent of students chose it. But when the IDR plan was the default plan, only 34% opted to sign up for a standard repayment plan.
“The simple point to remember is that changing the default option can be inexpensive and very profitable leverage for government – and for students,” Kreisman wrote. “Right now, the onus is on borrowers to navigate an overly complex repayment system. All the evidence indicates that this is a political failure that costs both students and taxpayers. “
Kreisman said Inside higher education that he believes having an IDR plan as the only plan – while giving borrowers the option to prepay – would help solve many of the issues that exist with IDR plans, such as recertifying income every year. Negotiators also expressed concerns about the recertification process during the first negotiated rule-making session, but looked to more automation and data sharing between federal agencies as a potential solution.
The IDR plans could help prevent many borrowers from defaulting when the repayment break ends on Jan.31, 2022, Kreisman said. But the department won’t be able to resolve issues with the plans by then – they have yet to come up with regulatory text on the IDR plans for negotiators to consider. Yet given all that is going on in federal student aid, the findings of the reports are necessary for those thinking about reform.
“I think now is the time to understand the experience of black borrowers and what they expect from policy makers,” Jackson said.