Borrowers must recertify their information annually, and after 20 to 25 years’ worth of qualifying payments, they are eligible to have their remaining balances forgiven. (Some borrowers are eligible for forgiveness sooner if they work in public service.) As part of these plans, borrowers with incomes below a certain threshold can "pay" as little as $0 per month.
In general, income-driven repayment plans have helped borrowers avoid delinquency and default by making payments more affordable. But for many, they also extend the amount of time borrowers spend in repayment and can increase the total amount repaid. In fact, growing participation in income-driven repayment plans has contributed to slower repayment, and thus aggregate balance growth over time. In 2017, 27% of borrowers and 45% of loan dollars were enrolled in such plans.
While an important protection for struggling borrowers, these plans, and the student loan repayment system in which they operate, are deeply in need of reform. For example:
- Some borrowers, especially those with high expenses, may not be able to afford their payments, even while enrolled in an income-driven plan.
- Many borrowers’ balances are growing each month, even when they are making payments, which can be frustrating and overwhelming.
- Borrowers can face a host of administrative barriers to enrolling in income-driven plans - including confusing paperwork - which can prevent those who otherwise might benefit from enrolling. (Importantly, a 2019 law would reduce some of these barriers, but it has yet to be fully implemented.)
- The default system is complex and overly punitive. Defaulting on a loan triggers severe consequences, including wage garnishment, withholding of federal benefits, and damage to credit scores, among others. And because interest continues to accrue while a borrower is in default - and exiting default can involve high fees - borrowers can return to good standing owing far more than they did before defaulting.
- The system is in need of clear standards for and strong oversight of its contractors, as well as an assessment of which metrics and compensation structures produce positive borrower outcomes.
- And a lack of data and transparency around who is in various repayment plans and their outcomes makes evidence-based policy making a challenge.
American higher education policy is at an inflection point. It is clear that no single policy or focus can solve all the issues causing challenges within and caused by the student loan system. Stakeholders from across the political spectrum, and including policymakers, advocates, researchers, and practitioners, have proposed a range of policies-and we will need a suite of reforms-to set current and future students and borrowers up for success. As I note in this recent essay for the Brookings institution, proposals include:
- A focus on debt cancellation, including making existing programs that forgive loans - such as those for public servants, disabled borrowers, and those who were defrauded by their schools - work better and cancelling some or all student debt.
- A focus on "fixing the income-driven repayment system...including lowering payments for struggling borrowers, addressing interest accrual and growing balances, reducing the length of time borrowers carry debt, removing administrative hurdles to enrollment and reenrollment, [and] improving oversight of programs and contractors."
- A focus on the less often discussed problem of student loan default, including creating a "simpler pathway out of default, creating consistent terms for all borrowers who exit, forgiving debt for those who have been in default for an extended period of time, limiting collections, and eliminating the default system by allowing existing loan servicers to manage defaulted loans."
While these solutions are not mutually exclusive - in fact, we need multiple to begin moving toward a more equitable system - they have largely moved forward in fits and starts over the last decade. As President Biden’s administration and the 117th US Congress get to work, questions remain about their priorities and whether these reforms will all be tackled through an ambitious legislative and regulatory agenda.
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