Income-Driven Repayment (IDR) plans are a true lifeboat for millions of federal student loan borrowers struggling to repay their student loans. The programs provide uniquely-tailored monthly payments for borrowers based on income and family size, with a loan forgiveness safety net at the conclusion of the repayment term (20 or 25 years, depending on the specific plan). For many student loan borrowers, an IDR plan is the only thing standing between them and default.
The problem, though, is that the IDR system is a mess. For one thing, we have a confusing menu of individual IDR plans – there’s Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). Each plan has its own formula, unique eligibility criteria, and strange programmatic quirks. Figuring out what plan is right for you – and whether you should switch – can be a daunting task.
The complexities of IDR programs don’t make the struggling student loan servicing system any better, either. The CFPB recently released a report slamming student loan servicers for IDR-related processing delays and mistakes. Borrowers are frequently getting bumped off of IDR plans through no fault of their own, leading to serious negative consequences.
I think the current system is just not sustainable on a long term basis, even as more borrowers rely on these IDR programs to stay afloat. Things must change. Well, I think we’re starting to see the beginnings of reform.
New IDR Application Form
The U.S. Dept. of Education just released a new IDR application form. If you have dealt with ICR, IBR, PAYE, or REPAYE during the past year or so, you probably found the “one stop shop” IDR application to be nothing short of a disaster – a confusing choose-your-own-adventure story with 8 separate sections or subsections and 27 questions – all to make a simple calculation based on a borrower’s income and family size. The newly-released form is more streamlined. They have reduced the number of questions down to 20, and they have made inquiries about income and martial status a bit simpler. However, this is not a perfect fix. The form still seems to require spousal income information, even where the borrower is not required to provide that under federal law (for example, if the borrower filed taxes as Married-Filing-Separately and selects the IBR plan).
Automated IDR Recertification
In a remarkable turn of events, a group of 20 organizations including unions, consumer advocates, and student loan servicers wrote to the federal government to ask for automatic renewal of IDR plans. Right now, one of the biggest problems with IDR programs is that borrowers must affirmatively re-apply each year to get their monthly payments recalculated. If the recertification deadline is missed – either because of borrower oversight or a servicer processing delay – the borrower’s monthly payment can skyrocket. This rare alliance of groups is urging the federal government to relieve borrowers and servicers of this burden by having the federal government automatically renew the plans by allowing the IRS and the U.S. Dept. of Education to share borrower income information. It is likely that no new legislation would be required to implement this change, meaning Congressional gridlock is not an obstacle.
Simplified IDR Payment
Servicers and borrower advocates are also calling for simplified payment options for borrowers in IDR plans. One proposal that continues to gain traction is automatic payroll deductions from borrower paychecks. This would eliminate the need for annual IDR recertification altogether (since changes to income would automatically be reflected through the payroll deduction). It could also cut down on the need for deferments and forbearance during periods of unemployment, since no payments could be made if the borrower is earning no income (and this is allowable under IDR plans already).
A Single, Consolidated IDR Plan
Group are also calling for the consolidation of ICR, IBR, PAYE, and REPAYE into a single, streamlined IDR plan. This is a murkier proposal, however, and we don’t know what a consolidated IDR plan may look like. Each of the plans have their own unique benefits, and so there is a risk that some of those benefits could be lost through a consolidated plan. We also don’t know whether borrowers who can currently access multiple plans could continue to do so, or whether everyone would be forced into the consolidated plan.
Aside from the new IDR application form – which was just released this month – the changes to IDR programs are, so far, proposals. However, I do expect that we will see changes implemented within the next year or two. Some of these reforms (such as automated IDR renewal through federal agency information sharing) can be made through executive action. Others, such as creating a new consolidated IDR plan, will require an act of Congress. Either way, the election is going to be determinative in what changes we see during the next couple of years.