In theory, income-related repayment plans (IDRs) allow federal student loan borrowers to limit their monthly payment amount to a percentage of their discretionary income and achieve debt relief after a specified repayment period. In practice, however, IDR plans are plagued by administrative obstacles that make it difficult for borrowers to take advantage of the promised benefits.
A new report from the Brookings Institute describes the challenges facing the IDR program and how to address them:
Read on to learn more about the problems faced by borrowers enrolled in IDR plans and how student loan experts propose to solve these problems. If you are looking for alternative student loan repayment options, you may consider refinancing into a private student loan at a lower interest rate. You can visit Credible to compare student loan refinance rates for free without hurting your credit score.
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The majority of borrowers do not sign up for IDR plans
Only one-third of eligible direct loan borrowers are enrolled in an IDR plan, according to Department of Education data as of June 2021. This includes many graduates who likely would have qualified for reduced payments and eventual debt relief.
Additionally, IDR plans are managed by a borrower’s loan servicer, not the education department. Brookings researchers said that “service providers did not always have incentives to enroll borrowers in IDR.” Here’s how they propose to increase participation in the IDR program:
- Make IDR the default repayment schedule for borrowers so they can opt out instead.
- Automatically enroll defaulting borrowers with IDR and automatically lower their monthly payments.
- Improve consumer protection for student loan providers administering IDR plans.
Wider use of IDR plans would likely benefit borrowers who need help most, the report said, namely those with low incomes and large loan balances.
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Some borrowers cannot afford their IDR payments
Despite the fact that IDR plans are designed to cap a borrower’s state student loan payments to a percentage of their disposable income, many still find their payments prohibitive. According to the Brookings Institute, the current formula used to determine IDR payments does not take into account other expenses that affect a borrower’s income, as well as regional differences in the cost of living.
The report’s authors suggest that IDR payments could be determined using the state’s median income, although they acknowledge that this could be a tedious process for loan servicers and the Department of Education.
Alternatively, some borrowers may be able to reduce their monthly student loan payments through refinancing. Keep in mind that refinancing your federally held debt into a private student loan would make you ineligible for IDR plans, deferral of economic hardship, and federal student loan forgiveness programs. You can learn more about student loan refinance by connecting with a knowledgeable loan expert at Credible.
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Many IDR borrowers do not comply with the program rules
More than half of IDR borrowers fail to recertify their income on time as required each year, economists at the Brookings Institute said. This can result in an automatic increase in monthly payments, increasing the total debt and lengthening the total repayment period. They suggest the following suggestions to improve eligibility:
- Loan payments withheld from paychecks. This would automatically suspend a borrower’s monthly payments if they lose their job, but it can be potentially damaging to the most vulnerable borrowers.
- Improve data sharing between the IRS and the Department of Education, potentially eliminating the need for borrowers to recertify their income each year.
- Simplify recertification by removing bureaucratic hurdles and inaccessible paperwork. One proposal is to allow borrowers to confirm their income over the phone.
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IDR payments are often not large enough to cover any interest incurred
In certain circumstances, the IDR payment amount does not cover the accrued interest on the loan. Consequently, many borrowers enrolled in IDR plans see their debt growing over time, even as they make payments on their student loans.
Although the remaining balance is forgiven after a specified repayment period, the prospect of rising student debt “can be daunting for borrowers making the required monthly payments,” the report said. High levels of debt can also affect a borrower’s creditworthiness by hurting their debt-to-income ratio (DTI). The authors propose the following solutions to address this issue:
- Eliminate or subsidize interest rates for IDR borrowers. However, this would be an expensive solution for the state, which could benefit borrowers who could otherwise afford interest payments.
- Subsidize all unpaid interest to keep low-income borrowers from increasing loan balances. But unless it is made retrospective, it would not remove the interest already accrued.
- Limit cumulative payments, including principal and interest, to the total amount a borrower would have paid under a standard 10-year amortization schedule.
These policies might one day benefit IDR borrowers, but they don’t help consumers who are currently burdened by high student loan balances. You can sign up for free credit monitoring through Credible to see how your DTI is affecting your credit score.
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Debt relief through IDR plans can take up to 25 years
One of the biggest advantages of IDR plans is the promise that student loans will be forgiven after 20 or 25 years. But for some borrowers, “the length of the repayment period can make it difficult to imagine ever paying off their loans,” the report’s authors said. They offer some suggestions to change the cooling off period:
- Shorten the repayment period for all IDR borrowers or determine it based on the debt level. However, this can exacerbate racial disparities, as black borrowers tend to borrow larger 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 could encourage them to remain enrolled in an IDR plan.
- Cancel the difference between a borrower’s IDR payment and their traditional fixed payments through a forget-as-you-go program.
Due to the complexity of the IDR plan rules, some borrowers can take as long as 25 years to achieve forgiveness. And with a growing loan balance, some borrowers may experience negative credit impacts over decades of repayment.
If you’re looking for ways to pay off student loan debt faster, you might consider refinancing into a shorter-term personal loan at a lower interest rate. You can compare current refinance rates in the table below and use Credible’s student loan calculator to determine if this strategy is right for you.
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