The Administration’s plan would reduce loan bills for eligible borrowers and fix several program flaws, but misses opportunities to make repayment work for low-income borrowers
WASHINGTON – Today, the Department of Education proposed regulations that would significantly change income-driven repayment (“IDR”) plans for tens of millions of federal student loan borrowers. While the changes to student loan repayment that the Department of Education proposed are directionally good, Abby Shafroth, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, warns the proposal doesn’t go far enough to fix a badly broken system.
Compared with existing plans, the amended plan offers several big advantages: it would cut monthly payments on undergraduate loans by over half, ensure that people do not have to make payments while earning wages under the equivalent of $15/hr, and provide a shorter path to being debt free for people who borrow lower amounts.
“These changes will provide much-needed relief for eligible lower income borrowers, but not everyone is eligible,” said Shafroth. “The Department would continue to exclude parents who borrow for their children’s education from the plan, denying many low-income parents the opportunity to break free of student debt in their lifetime.”
The proposal would also continue to leave most borrowers in debt for 20 to 25 years, which Shafroth argues, “is simply too long.”
To address the increasing problem of borrowers in IDR plans being charged more in interest each month than they pay–leading their loan balances to go up rather than down with each payment–the Department of Education proposes to effectively write off any unpaid interest each month.
“The changes to prevent student loan balances from growing even while borrowers make payments are critical, but do not go far enough,” said Shafroth. “While loan balances would no longer grow under the plan, many borrowers’ balances will simply stay the same as their payments go entirely toward interest and never touch their principal–a major pain point for borrowers.”
”Many borrowers will face a big tax bill when their balance is finally forgiven, as well,” Shafroth warned. “In the final rule, the Department should provide a more complete solution by writing off the difference between the borrower’s income-adjusted payment and what their payment would be on a standard repayment plan, allowing borrowers to make steady progress toward being debt free.”
The Department also proposes important changes that, theoretically, would allow it to automatically enroll borrowers who fall behind in payments into a more affordable IDR plan, which could help reduce high default rates in the student loan system, and would for the first time allow borrowers already in default to access an IDR plan.
“Automatically enrolling distressed borrowers in income-driven repayment and giving defaulted borrowers access to these plans is a really important step toward fixing the student loan safety net and ensuring that low-income borrowers are not forced to pay more than they can afford simply because they don’t know about their loan options or how to access them,” added Shafroth. “The Department should prioritize implementing these provisions.”
Additional background materials:
- NCLC / Legal Aid Society of Cleveland, Rulemaking Committee Memo Responding to IDR Rule Proposals and Recommending Changes to the Structure of Forgiveness and Discretionary Income Threshold, Nov. 2, 2021
- Policy Brief: Education Department’s Decades-Old Debt Trap: How the Mismanagement of Income-Driven Repayment Locked Millions in Debt, March 2021
- NCLC/SBPC/CRL Issue Brief: Restoring the Promise of Income-Driven Repayment: An IDR Waiver Program Proposal, Jan. 12, 2022
- Group letter calling on U.S. Secretary of Education Miguel Cardona to reform broken, dysfunctional income-driven repayment (IDR) programs and fulfill the promise of IDR, Apr. 7, 2022
- NCLC/SBPC Blog: Explosive New Evidence of Mismanagement of Student Loan Program Shows Need for IDR Waiver, April 2021
- NCLC/CRL Brief: Almost Two in Three Navient Borrowers Enrolled in IDR Plans and Making Payments During COVID-19 Federal Student Loan Payment Pause Are Underwater (Last updated August 2021)
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