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Two recent reports highlight the need for reforms to income-based student loan repayment plans as the repayment hiatus ends early next year and the Department of Education tries to come up with a new plan as part of the regulatory process.
Of the borrowers in repayment in the Education Trust’s study of black borrowers’ experience with student loans, 72 percent were in an income-based repayment plan (IDR). These borrowers described IDR as what felt like a “life-long debt penalty” the reportbased on a national survey of nearly 1,300 black borrowers and in-depth interviews with 100 black borrowers.
“Borrowers often felt they were making payments with no end in sight, and then there was other financial debt – from payday loans or home loans or car or credit card debt,” said Jalil Bishop, co-author of the report. “They feel that education should give them the resources and the opportunity to overcome this debt, but student loans have become a place where that debt intensifies.”
The Department of Education offers four IDR federal student loan repayment plans designed to make monthly payments by borrowers more affordable by based on their income and family size. Each plan has a different payback period, but they typically last between 20 and 25 years. Borrowers are also required to re-certify their income and family size each year so their loan service provider can recalculate their payment. At the end of the repayment period, any remaining amount of the loan will be waived.
Theoretically, IDR is supposed to help borrowers live more comfortable lives while paying off their debts. But that doesn’t really happen, especially for black borrowers, said Victoria Jackson, assistant director of higher education for the Education Trust. Payments are still unaffordable for some borrowers – nearly a quarter of respondents said they had difficulty paying rent, health care, and groceries, and 71 percent said they couldn’t afford a savings account.
Borrowers reported that payments for IDR plans were so low they covered enough to save them from defaulting but not enough to repay the interest or principal on their loan. You often see your balance “bloated,” Jackson said.
Most of the respondents – 80 percent – said they supported comprehensive federal government debt relief, which Bishop said would help tackle “the history and pattern of mismanagement and poor design of student loan repayment plans.” However, borrowers also want reforms to IDR plans that allow them to make real progress in paying back their loans – through subsidies or the elimination of interest – and plans that match the original terms of their student loans.
“When people borrow student loans, the standard repayment schedule is 10 years,” said Bishop. “Many borrowers couldn’t understand why they were pursuing these 20- and 25-year plans because when they took out the debt, they believed they couldn’t repay it too long after they were closed.”
The Department recognized Many of these IDR plans issues during the negotiated rulemaking process, which tells negotiators they want to create a new IDR plan that addresses the long repayment deadlines, accrued interest, prohibitive payments, and the number of plans with varying terms. The challenges of a variety of IDR plans were highlighted during the first negotiation session by Rachelle Feldman, associate provost and director at the University of North Carolina at Chapel Hill, who serves as the assistant negotiator for four-year public institutions.
“I just want to make a real plea for having fewer paths so that it’s less confusing for everyone – not just us [Public Service Loan Forgiveness] Borrowers, but our borrowers at all levels, â€Feldman said.
Daniel Kreisman, associate professor of economics at Georgia State University, agrees and says in a recent report for Third Way that the department should restrict options 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 that result in the highest loan defaults, Kreisman wrote. IDR plans might be better suited for borrowers, but there are barriers to accessing them – they need to contact their loan service provider and continually certify their income – and many borrowers are unaware that this option exists.
Kreisman conducted a laboratory experiment at Georgia State with 542 students in which the preselected repayment plans were switched between groups. When the standard repayment plan was the standard, 63 percent of students opted for it. But when the IDR plan was the standard, only 34 percent opted for a standard repayment plan.
“The simple takeaway is that changing the default option can be an inexpensive and rewarding lever for the government – and for students,” wrote Kreisman. “Right now, the burden is on borrowers to find their way through an overly complex repayment system. All evidence suggests that this is a political failure that is costing both students and taxpayers. “
Kreisman told Inside Higher Ed that he believes that an IDR plan as the only plan – while still giving borrowers the option to pay upfront – would help solve many of the problems that exist with IDR plans, such as the annual one Recertification of income. Negotiators also raised concerns about the recertification process during the initial rule-making negotiation session, but turned to more automation and data sharing between federal agencies as a possible solution.
IDR plans could help many borrowers avoid defaulting payments if the repayment hiatus is lifted on January 31, 2022, Kreisman said. But the department will not be able to fix the problems with the plans until then – they have not yet proposed a regulatory text on IDR plans that negotiators should consider. Nonetheless, given all that is happening within Bundesstudienhilfe, the results in the reports are necessary for those considering reforms.
“I think now is a good time to understand the experiences of black borrowers and what to expect from policymakers,” Jackson said.
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