29 Jan 2021 Improving Income-Driven Repayment in the Wake of COVID-19 in Economics and Finance

The federal government has temporarily suspended monthly payments and interest accruals on federal direct student loans, with the goal of providing relief for borrowers in this time of economic hardship. Payments are tentatively set to resume in October, meaning that Congress has ample opportunity to enact reforms aimed at easing the repayment process and ensuring that borrowers can meet their obligations when the suspension is lifted.

The Problem

Income-driven repayment (IDR) plans offer flexibility to borrowers by allowing them to tie their monthly student loan payments to a portion of their discretionary income (defined as the difference between adjusted gross income and 150% of the federal poverty level). However, a complicated application process and burdensome income verification requirements hamper uptake. This red tape will continue to impede enrollment in IDR when payments resume, elevating delinquency rates and exacerbating financial insecurity during a time of economic upheaval.

Even prior to the pandemic, many borrowers struggled to repay their loans. Nearly 40% of federally managed loans scheduled for repayment were in delinquency or default in 2019. This burden disproportionately falls on Black borrowers, who are nearly 2.5 times as likely to default as white borrowers within six years of entering repayment.

Recommendation

During this period of loan suspension, we urge lawmakers to lay the groundwork for a simplified IDR system characterized by auto-enrollment and facilitated by enhanced data-sharing.

• Reduce IDR options to a single plan. Currently, borrowers can choose from four separate IDR plans, each with varying terms. This is unnecessarily complex, making it difficult for borrowers to gauge which plan is in their best interest. Moving forward, we recommend creating a single IDR plan. Payment should be tied to an affordable portion of a borrower’s discretionary income to promote financial security.

• Auto-enroll all borrowers into IDR when payment resumes. Under this framework, all borrowers expected to be in repayment would be placed on IDR when the emergency suspension ends. This change could be enabled through additional data-sharing between government agencies. Borrowers would receive notification in advance of this change going into effect. Those who decline data-sharing (and were not previously on IDR) would remain on their current plan, with the opportunity to manually certify their income if they wish to enroll in IDR. All borrowers could opt out of IDR and enter the standard plan at any time.

Rationale

Automatically enrolling borrowers into IDR when payment resumes would reduce default rates and protect vulnerable borrowers. Additionally, this would place the loans of public-service workers, many of whom are frontline workers, into a plan that is eligible for eventual Public Service Loan Forgiveness. With COVID-19 continuing to pose a long-term threat to financial security, it is critical that Congress work to promote flexibility and support for student borrowers, both during the immediate crisis and in the years to come.