In theory, income-driven repayment plans (IDRs) allow federal student loan borrowers to cap their monthly payment amount to a percentage of their discretionary income and achieve debt forgiveness after a certain repayment period. But in practice, IDR plans are plagued by administrative roadblocks that make it harder for borrowers to reap the benefits they were promised.
A new report from the Brookings Institute outlines the challenges facing the IDR program, and how to address them:
- The majority of borrowers don't enroll in IDR plans
- Some borrowers can't afford their IDR payments
- Many IDR borrowers don't follow the program rules
- IDR payments are often not large enough to cover accruing interest
- Debt forgiveness through IDR plans can take up to 25 years
Keep reading to learn about the problems facing borrowers who are enrolled in IDR plans, as well as how student loan experts propose to solve these issues. If you're searching for alternative student loan repayment options, you might consider refinancing to a private student loan at a lower interest rate. You can visit Credible to compare student loan refinance rates for free without impacting your credit score.
Just a third of eligible Direct Loan borrowers are enrolled in an IDR plan, according to June 2021 data from the Department of Education. This includes many graduates who would have likely qualified for reduced payments and eventual debt forgiveness.
Additionally, IDR plans are administered by a borrower's loan servicer, not the Education Department. The researchers at Brookings said that "servicers have not always had incentives to enroll borrowers in IDR." Here's how they propose increasing participation within the IDR program:
- Make IDR the default repayment plan for borrowers, allowing them to opt out instead.
- Auto-enroll delinquent borrowers in IDR, automatically lowering their monthly payment.
- Improve consumer protections aimed at student loan servicers who administer IDR plans.
Making IDR plans more widely used would likely benefit the borrowers who need help the most, the report suggests — those with low incomes and high loan balances.
Despite the fact that IDR plans are designed to limit a borrower's federal student loan payments 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 doesn't take into account other expenses impacting a borrower's income, as well as the regional differences in cost of living.
The report's authors propose that IDR payments could be determined by state median income, although they admit that this could be a burdensome process for loan servicers and the Education Department.
Alternatively, some borrowers may be able to reduce 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 getting in touch with a knowledgeable loan expert at Credible.
More than half IDR borrowers fail to recertify their income on time each year as required, economists at the Brookings Institute said. This can lead to an automatic increase in monthly payments, add to the total debt amount and extend the overall repayment term. They suggest the following proposals to improve eligibility:
- Withhold loan payments from paychecks. This would automatically suspend a borrower's monthly payments if they lose a job, but it may be potentially harmful for the most vulnerable borrowers.
- Improve data sharing between the IRS and the Education Department, which could potentially eliminate the need for borrowers to recertify their income each year.
- Simplify recertification by removing bureaucratic hurdles and inaccessible paperwork. One suggestion is to make it possible for borrowers to recertify their income over the phone.
In some circumstances, the IDR payment amount doesn't cover the loan's accruing interest. Consequently, many borrowers who are enrolled in IDR plans see their debt balances grow over time, even when they're making payments on their student loans.
Although the remaining balance will eventually be forgiven after a certain repayment period, the prospect of ballooning student debt can be "discouraging to borrowers who are making required monthly payments," the report reads. High levels of debt can also damage a borrower's credit score by throwing off their debt-to-income ratio (DTI). The authors propose the following solutions to address this problem:
- Eliminate or subsidize the interest for IDR borrowers. However, this would be an expensive solution for the government that may benefit borrowers who could otherwise afford interest payments.
- Subsidize all unpaid interest to prevent loan balances from rising among low-income borrowers. But unless made retroactive, it wouldn't eliminate the interest that's already accrued.
- Cap the cumulative payments, including principal and interest, to the total amount a borrower would have paid under a 10-year standard repayment plan.
These policies could someday benefit IDR borrowers, but it doesn't help consumers who are currently burdened by high student loan balances. You can enroll in free credit monitoring through Credible to see how your DTI is impacting your credit score.
One of the biggest draws of IDR plans is the promise of student loan forgiveness after 20 or 25 years of repayment. But for some borrowers, "the length of the repayment period may make it difficult to envision ever paying their loans," the report's authors said. They offer a few proposals for altering the cancellation period:
- Shorten the repayment period for all IDR borrowers, or determine it based on the debt balance. But this may exacerbate racial disparities, since borrowers of color tend to take on higher loan amounts.
- Cancel a percentage of the loan balance each year. This would ensure a borrower's loan balance doesn't increase each year and may encourage them to stay enrolled in an IDR plan.
- Cancel the difference between a borrower's IDR payment and their conventional fixed payments through a forgive-as-you-go program.
Because of the complexities around IDR plan rules, it may take some borrowers even longer than 25 years to achieve loan forgiveness. And with a growing loan balance, some borrowers may experience negative credit impacts throughout decades of repayment.
If you're searching for ways to pay down student loan debt faster, you may consider refinancing to a shorter-term private loan at a lower 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.
Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at firstname.lastname@example.org and your question might be answered by Credible in our Money Expert column.