One of the promising developments in student loan policy has been income-based repayment, which allows borrowers to pay back their loans based on their income.
It’s a potentially great program, but it turns out it’s not working so well.
Former students pay no more than 15 percent of their annual household incomes toward their debt. After 25-years, any remaining debt is forgiven.
Borrowers have to certify that rate every year. This makes sense. It would be a gigantic problem if borrowers kept paying 15 percent of their original income toward student loans once their income became much higher. But a lot of people (the majority of IBR borrowers) are falling out of the program because they fail to certify on time. According to an article in the Chronicle of Higher Education:
Over the course of a yearlong period from 2013 to 2014, almost 700,000 borrowers who had enrolled in income-based plans — 57 percent of the total — failed to “certify” their income by the deadline. That lapse sent the borrowers into standard repayment, where their monthly loan bills were higher, sometimes significantly so.
While roughly a third of the borrowers who missed the deadline re-enrolled in income-driven plans within six months, a third went into a hardship-related forbearance or deferment, and some 15 percent became delinquent on their debt, according to the officials…. (And that’s just the borrowers with direct loans. Borrowers with loans made under the old bank-based lending program missed the deadline about 40 percent of the time, according to loan servicers sitting on the rule-making committee.)
Why is this happening? Well, according to the article “One reason may be that they’re ignoring or overlooking the renewal notices that servicers are required to send 60 to 90 days before the paperwork is due.”
This is technically true but—full disclosure here: I was one of those people who failed to certify my income by the deadline last year—the fact that 57 percent of those in IBR failed to certify on time indicates that the method of certifying new income, and the way the Department of Education informs borrowers that it’s time to certify again, are convoluted and difficult to understand.
When I got my letter informing me it was time to certify or risk having my monthly payment increase dramatically I immediately called up the number provided, only to be informed that the person at the other end of the line didn’t know how to fix the problem. I had to call four different numbers before someone could tell me what to do. And even then it was too late, and for a month I was out of IBR.
In fact, it almost seemed like the process was designed in order to kick people off of IBR. According to the article, DOE is trying hard to fix the problem:
The Education Department is preparing to test new ways of communicating with borrowers. A pilot program, which starts this month, will begin when the department sends borrowers reminders after their servicers’ notifications go out. Later, the department will take over the process altogether, to see if government-branded emails and texts are more effective than those sent by servicers. The agency is working with social and behavioral scientists at the White House to craft its messages.
Well yes, I suppose “working with social and behavioral scientists at the White House to craft its messages” is one way to address this. Another, potentially much more effective, way would be to automatically certify based on tax returns.
We submit our tax returns in April. By May every year the Education Department could automatically adjust the amount due based on IBR borrowers’ newly provided income. And then no one would get kicked out.