Student borrowers struggle with income-driven repayment plans: Brookings Institute

A new report from the Brookings Institute has identified the biggest problems with income-driven repayment plans and how to fix them. (iStock)

In theory, income-based repayment (IDR) plans allow federal student loan borrowers to cap their monthly payment amount at a percentage of their discretionary income and get debt forgiveness after a certain repayment period. . But in practice, IDR plans are plagued with administrative hurdles that prevent borrowers from reaping the benefits they have been promised.

A new report from the Brookings Institute describes the challenges facing the IDR program and how to overcome them:

Keep reading to learn more about the issues borrowers on IDR plans face, and how student loan experts are offering to address these issues. If you are looking for other student loan repayment options, you might consider refinancing a private student loan at a lower interest rate. You can visit Credible to compare student loan refinance rates for free without affecting your credit score.


Majority of borrowers do not enroll in IDR plans

According to June 2021 data of the Ministry of Education. This includes many graduates who likely would have qualified for reduced payments and possible debt forgiveness.

Additionally, IDR plans are administered by the borrower’s loan department, not the Department of Education. The Brookings researchers said that “repairers have not always had an incentive to enroll borrowers in IDR.” Here is how they propose to increase participation within the IDR program:

  • Make IDR the default repayment plan for borrowers, allowing them to opt out instead.
  • Automatically enroll overdue borrowers in IDR, automatically reducing their monthly payment.
  • Improve consumer protections for student loan servicers who administer IDR plans.

Making IDR plans more widely used would likely benefit borrowers who need the most help, the report suggests – those with low incomes and high loan balances.


Some borrowers cannot afford their IDR payments

Although IDR plans are designed to limit a borrower’s federal student loan repayments to a percentage of their disposable income, many still find their payments unaffordable. According to the Brookings Institute, the current formula for determining IDR payments does not take into account other expenses that affect the borrower’s income, as well as regional differences in the cost of living.

The report’s authors propose that IDR payments could be determined by median state income, though they admit that this could be a cumbersome process for loan servicers and the Department of Education.

Alternatively, some borrowers may be able to lower their monthly student loan payments by refinancing. Keep in mind that refinancing your federally held debt into a private student loan would make you ineligible for IDR plans, economic hardship deferment, and federal student loan forgiveness programs. You can learn more about student loan refinancing by contacting a knowledgeable loan expert at Credible.


Many IDR borrowers do not follow program rules

More than half of IDR borrowers fail to recertify their earnings on time each year, as needed, Brookings Institute economists said. This can lead to an automatic increase in monthly payments, increase the total amount of debt and extend the overall repayment term. They suggest the following proposals to improve eligibility:

  • Withholding loan payments from paychecks. This would automatically suspend a borrower’s monthly payments in the event of job loss, but it could be potentially damaging for the most vulnerable borrowers.
  • Improve data sharing between the IRS and the Department of Education, which could potentially eliminate the need for borrowers to recertify their income each year.
  • Simplify recertification by removing bureaucratic hurdles and inaccessible documents. One suggestion is to allow borrowers to recertify their income over the phone.


IDR payments are often not large enough to cover accrued interest

In certain circumstances, the amount of the IDR payment does not cover the accrued interest of the loan. As a result, many borrowers enrolled in IDR plans see their debt balance increases over time, even as they pay off their student loans.

Although the remaining balance is eventually canceled after a certain period of repayment, the prospect of increased student debt can be “disheartening for borrowers making the required monthly payments,” the report says. High levels of debt can also hurt a borrower’s credit rating by dropping their debt-to-income ratio (DTI). The authors propose the following solutions to solve this problem:

  • Eliminate or subsidize interest for IDR borrowers. However, it would be a costly solution for the government that could benefit borrowers who might otherwise pay the interest.
  • Subsidize all unpaid interest to prevent loan balances from increasing among low-income borrowers. But unless retroactive, it would not eliminate the interest already accrued.
  • Cap cumulative payments, including principal and interest, at the total amount a borrower would have paid under a standard 10-year repayment plan.

These policies may one day benefit IDR borrowers, but they do not help consumers who are currently burdened with high student loan balances. You can sign up for free credit monitoring through Credible to see how your DTI impacts your credit score.


Debt cancellation through IDR plans can take up to 25 years

One of the biggest attractions of IDR plans is the promise of student loan cancellation after 20 or 25 years of repayment. But for some borrowers, “the length of the repayment period can make it difficult to ever consider repaying their loans,” the report’s authors said. They offer a few proposals for changing the notice period:

  • Shorten the repayment period for all IDR borrowers or determine it based on the debt balance. But it can exacerbate racial disparities, as borrowers of color tend to take on higher loan amounts.
  • Cancel a percentage of the loan balance each year. This would ensure that a borrower’s loan balance does not increase every year and may encourage them to remain enrolled in an IDR plan.
  • Cancel the difference between a borrower’s IDR payment and their conventional fixed payments with a forgive-as-you-go program.

Due to the complexity of the IDR plan rules, some borrowers can take even more than 25 years to get loan forgiveness. And with a growing loan balance, some borrowers may experience negative credit impacts for decades of repayment.

If you’re looking for ways to pay off your student loan faster, you might consider refinancing a shorter-term private loan at a lower rate. You can compare current refinance rates in the chart below and use Credible’s student loan calculator to determine if this strategy is right for you.


Do you have a financial question, but you don’t know who to contact? Email the Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.

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