Does America's preferred student loan repayment program work? 'That is the big question'


The federal government has consistently hailed income-driven repayment (IDR) as the best way for the tens of millions of American student loan borrowers to pay back federally-held student loans.

But experts are questioning whether that system, which adjusts a graduate’s monthly student loan payments based on their income level, is fundamentally broken.

“Does income-driven repayment really work? That is the big question,” Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, told Yahoo Finance. “Looking back, there have been a lot of problems.”

‘Shockingly low rate of cancellation’

IDR plans first came into existence as an “income-contingent repayment plan” in 1994. Graduates with federal loans could pay back the debt at levels that matched their income that given year.

After 25 years of repayment, if borrowers made payments consistently, the remainder of their loans would be forgiven. So if the first IDR participants came into these plans in 1995, they would have been eligible for cancellation in 2020. But it’s unclear how many of them have actually gotten forgiveness.

U.S. President Barack Obama (L) talks with student Christopher Dean before Dean introduced Obama to deliver the commencement address for Booker T. Washington High School in Memphis, Tennessee May 16, 2011.   REUTERS/Kevin Lamarque  (UNITED STATES - Tags: POLITICS EDUCATION IMAGES OF THE DAY)

In 2009, the income-contingent plan morphed into the “income-based repayment plan” under an initiative undertaken by the Obama administration (and eventually became called “income-driven repayment” plans). Part of this new suite of repayment plans included a “Revised Pay As You Earn” plan, which allowed a borrower’s loans to be forgiven after 20 years, as opposed to 25.

So the earliest IDR participants would ostensibly have been eligible for forgiveness in 2015.

But NCLC’s Yu, citing a public records request to the Department of Education (ED), found that less than 20 IDR participants total were slated to get forgiveness by the end of 2019.

“The shockingly low rate of cancellation of these borrowers’ loans foreshadows the widespread problems affecting millions of low-income borrowers,” Yu asserted in a recent paper, “and is emblematic of the failure of the Department’s [IDR] programs to deliver the relief Congress intended for struggling borrowers when it passed the enabling statutes for these programs.”

A graduate walks up to receive his diploma from U.S. President Donald Trump at the Hope for Prisoners Graduation Ceremony attended in Las Vegas, Nevada, February 20, 2020. REUTERS/ Kevin Lamarque

Recognizing the complexities of the IDR system, the Trump administration considered reforming the income-based repayment plan.

According to a budget proposal released in February, the administration wanted to consolidate the five existing repayment plans into one and increase the percentage of income the borrower would pay per month from 10% to 12.5%. Consequently, the cancellation would come after 15 years, instead of 20 years, for undergraduates.

There are currently around seven million borrowers, holding about $530 billion in outstanding student loans, on IDR plans. The Congressional Budget Office estimated earlier this year that there has been a surge in people using these income-driven plans, from about 12% of federal loans in 2010 to 45% in 2017.

(Graphic: David Foster)
(Graphic: David Foster)

Who uses income-based repayment?

IDR plans are appealing because they are seemingly safe.

Daniel Collier, a research associate at the W.E. Upjohn Institute for Employment Research who focuses on student loans, explained that there is an appeal to simply needing to just faithfully make 20 years of payments to receive forgiveness.

“There have been former narratives … that the savvy borrowers were in these programs and they were taking full advantage of these programs for the tax breaks and eventual forgiveness, they're higher earners,” he explained. “That's not the average enrollee.”

Instead, Collier added, “it was middle-income people, people earning just below median or median earnings that were enrolled in income-driven repayment.”

George Washington University graduate Catalina Perez (R) receives a paper copy of her diploma from neighbor Paula Lytle as they keep a social distance at a surprise graduation party for Perez, who completed her undergraduate studies in International Affairs across the span of ten years only to miss her commencement due to the coronavirus disease (COVID-19) outbreak in Washington, U.S., May 17, 2020. REUTERS/Jonathan Ernst     TPX IMAGES OF THE DAY
George Washington University graduate Catalina Perez (R) receives a paper copy of her diploma from neighbor Paula Lytle in Washington, U.S., May 17, 2020. REUTERS/Jonathan Ernst

‘The system has been broken for too long’

While there are ways to fix this repayment system, Yu stressed reform likely wouldn’t go far enough.

“A, it’s not working,” Yu said, “And B, it’s not actually providing relief. We need cancellation and reform... the system has been broken for too long.”

Ashley Harrington, federal advocacy director and senior counsel at the Center for Responsible Lending, noted that the IDR system is “complex” and “has multiple repayment plans that people are struggling in” because of how “hard it is to stay enrolled and remain enrolled.”

Furthermore, “we’re like on our ninth iteration of [IDR] at this point,” Mark Huelsman, associate director of policy and research at Demos, said during a recent conference. “This stuff is hard and necessary to untangle… [but] we should actually start over.”

Cancellation would allow the government to clear out bad debt while also providing an opportunity to rethink how we finance higher education, according to Yu.

Huelsman added that broadly canceling student debt, which several prominent Democrats are urging the incoming Biden administration to do through executive action, would be “an admission about what we assumed about this financing instrument is not true.”

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