Upcoming rulemaking process expected to rethink student loan repayment
Student loan repayment based on income (IDR) plans, which calculate monthly payments based on income and family size, help reduce the risk of default and default for many borrowers. Federal Student Aid reports that about 30% of borrowers are enrolled in such plans, a finding reflected in a recent Pew survey. However, current and former borrowers who have used IDR plans report issues with their plan design, including unaffordable payments, growing balance, and confusing enrollment procedures.
The Ministry of Education this spring established a rule-making committee to examine reform of regulations related to income-tested reimbursement, among other important issues relating to higher education. As the committee begins its meetings in October, members should focus on redesigning IDR plans to make them more affordable for low-income borrowers, limit balance growth that can hamper repayment, and ensure borrowers can register easily.
A Pew survey carried out in spring 2021 among 2,806 people, including more than 1,000 borrowers, gives some idea of ââtheir concerns. For example, 61% of IDR plan participants said the need for a lower payment was the most important reason they chose to sign up. Even after doing so, almost half (47%) of people who have already or currently signed up for such a plan said their monthly payments were still too high. This could be caused by income that varies from month to month or by high expenses, such as childcare or health care.
The committee may also take into account that many borrowers in IDR plans experience high growth in their balances, which can cause discouragement and frustration. In the Pew survey, 72% of those who had already signed up for such a plan and started repaying said they owed more or about the same amount at that time than they had borrowed. initially, compared to 43% of borrowers who had never been enrolled in an IDR plan.
IDR plans are meant to reduce monthly payments, but it can extend repayment periods and increase balances, especially if borrower payments don’t keep up with the amount of interest that accumulates each month. Pew focus groups have shown that this can lead to negative psychological effects. When they start paying off the loan balance, borrowers see little progress, which can cause frustration or undermine motivation to repay.
Complex registration requirements also present a barrier for those looking for more affordable payments. Pew’s survey found that 44% of respondents who had previously signed up for an IDR plan said the application process was somewhat or very difficult to navigate. These difficulties may be related to barriers to enrollment such as limited information and assistance from loan officers or issues with the required annual recertification of income and family size.
Many borrowers also report not knowing that there are IDR plans. Of those who had never registered, 48% said not knowing about the program was the main reason. This group can include many low-income borrowers, who research shows are less likely to enroll than moderate-income borrowers. These results suggest that the department and providers should expand their outreach efforts and increase the quality of information on the benefits of income-oriented schemes for those borrowers who need the most help paying.
Focus on affordable payments
At the start of rule making, members of the bargaining committee should focus on how to make payments more affordable for low-income borrowers, reduce balance growth, and increase enrollment among borrowers in the future. difficulty. Since policymakers have a range of options, additional modeling and data can help identify the reforms that would best target the needs of low-income borrowers, those most at risk of encountering repayment problems. . Pew’s future research will identify the pros and cons of different approaches.
Among the possibilities, updated or new IDR plans could reduce the percentage of a borrower’s discretionary income used to calculate payments, resulting in a lower repayment charge. Traders could also increase the amount of income excluded from the calculation of monthly income-based payments.
Existing IDR plans typically exempt 150% of the federal poverty guideline, depending on family size and condition, from the payment calculation. Increasing the protected amount could help ensure that more low-income borrowers can afford the payments. Factoring borrowers’ expenses into the calculations, including those related to childcare or health care, could also help ensure that they are not strained financially by the monthly payment. of their student loan, although this change may add substantial complexity to the program.
Target balance growth
To help reduce the growth of balances, traders might consider eliminating or limiting the capitalization of interest in IDR plans to prevent balances from inflating. Currently, unpaid interest is capitalized – added to principal – in certain situations, which increases the amount subject to future interest charges. This can happen when borrowers change plans or if their annual income recertification is not submitted or processed on time. The ministry said that interest capitalization has no other financial purpose than to generate additional interest income for the government, except in the case of a loan consolidation.
Negotiators could decide to cap the amount of unpaid interest that can accumulate each month in IDR plans, waive interest for low-income borrowers, or suspend interest accumulation during deferral or forbearance periods when borrowers are enrolled in such plans.
Make it easier to navigate the process
Regulatory changes could also help boost uptake of IDR plans among borrowers most likely to experience repayment problems. For example, streamlining the number of existing plans would reduce borrower confusion and facilitate program access and implementation. While the committee may have limited ability to consolidate plans authorized by Congress, members should seek to reduce the number of plans as much as possible as part of this process.
Research also supports allowing borrowers who have defaulted to enroll in income-driven plans, rather than forcing them to go through the long and complex loan rehabilitation process first. Enrolling in an IDR plan greatly reduces the likelihood that borrowers who defaulted will do so again. Yet the Consumer Financial Protection Bureau found in 2017 that less than one in 10 borrowers who completed rehabilitation were enrolled in such plans within nine months of exiting the default.
Now is the time to craft regulations for income-oriented schemes that work for borrowers, especially those most at risk of default and default and who would benefit the most from reduced monthly payments. As they work to make changes during this fall’s sessions, negotiators should carefully consider the potential pros and cons of various options to provide relief to low-income borrowers as they create a more affordable approach. and accessible.
The Student Loan Survey was conducted for The Pew Charitable Trusts by SSRS via the SSRS Online Opinion Panel. Interviews were conducted from May 10, 2021 to June 16, 2021, with a representative sample of 2,806 respondents in total. The design margin of error for all respondents is plus or minus 3 percentage points at the 95% confidence level.
Travis Plunkett is the Senior Director of the Family Economic Stability Portfolio, Regan Fitzgerald is a Manager, and Brian Denten and Lexi West are senior partners of the Pew Charitable Trusts Student Success Borrower Project.