Income-Driven Repayment: Challenges and Options for Reform

If you are a federal student loan borrower currently in repayment, then you are likely familiar with income-driven repayment (IDR) plans which tie a borrower’s monthly repayment amount to their income. As of today, there are five different IDR plans that differ based on the percentage of a borrower’s income used to set the monthly repayment amount, the loan type that qualifies for the repayment plan, the number of years required in repayment before forgiveness, and a showing of partial financial hardship. Though the intent has always been to provide struggling borrowers with affordable options to repay their student loans, the complexity and availability of so many plans has created more issues for the 8 million borrowers enrolled in these plans than ever anticipated. These challenges include ballooning loan balances as a result of negative amortization, disparate treatment between undergraduate and graduate borrowers, the potential for heavy tax burdens as a result of loan forgiveness, and a cumbersome recertification process that can lead to forbearance or default.

Over the years, it has become more and more evident that changes are necessary to address these growing problems. So much so that earlier this year, the U.S. Department of Education announced a plan to conduct rulemaking on federal higher education policies including IDR plans. AccessLex has put together a comprehensive list of recommendations that we believe would alleviate a large number of the issues borrowers in IDR plans experience.

AccessLex Institute’s Recommendations

• Keep the 10-year standard, graduated and extended plans for all borrowers, the five current IDR plans for existing eligible borrowers, and create a new IDR plan available to all existing Direct Loan borrowers who wish to enroll and the only income-driven option for new borrowers.
• Base the percentage of discretionary income paid on the borrower’s income. This would ensure that higher income borrowers who may not need as much help pay more. 
• Eliminate interest capitalization, which is the process of adding any unpaid interest that has accumulated on a loan to the outstanding principal balance of a loan, so that debt balances do not continue to grow over time.
• Allow all borrowers to receive forgiveness after 20 years in repayment regardless of whether they borrowed for an undergraduate or graduate degree. This would ensure that graduate and undergraduate borrowers are treated fairly across the board. 
• Make loan forgiveness tax-free as these borrowers are likely least able to afford a huge tax bill.
• Ensure that the automatic recertification of income is not delayed so that borrowers are able to remain in IDR plans and avoid payment increases they cannot afford.
• Eliminate the requirement of partial financial hardship so that affordable repayment options are available to those we need it.
• Require that joint spousal income be used to determine monthly payments regardless of tax filing status.

These recommendations are part of a new issue brief published by AccessLex this week – “The Winding Road of Income-Driven Repayment: Challenges and Opportunities for Reform.” This issue brief details how we got to this point and how we can begin to climb our way out. AccessLex believes that IDR should be viewed as a government program that invests in human capital and improvements should be made to reflect that philosophy. Not only would the above changes simplify the myriad repayment plans for new borrowers, but it would also structure the new plan in a way that makes repayment truly manageable.

Read our issue brief on income-driven repayment plans.

Read our updated Higher Education Act policy recommendations.

Read our comment letter to the Department of Education.