Guest Post: A Closer Look at Income-Based Repayment

By Deanne Loonin

The new Income-Based Repayment program (IBR), which went into effect this month, is a very positive development for borrowers with low incomes who have taken on too much federal student loan debt. IBR is more broadly available than the existing (and still alive) Income Contingent Repayment option (ICR) in the Direct Student Loan program. The formula for determining eligibility for IBR is simpler than that for ICR and in most cases will result in lower payments for struggling borrowers.

Under IBR, borrowers who have a pre-tax income below 150 percent of the poverty line will not have to make any payments until their incomes rise over those levels. Those with higher pay will not be asked to devote more than 15 percent of the portion of their income above that threshold to student-loan repayment until they are earning enough to make regular payments. Any debt remaining after 25 years of payment through the IBR program will be forgiven by the federal government.

Still, as beneficial as this new program will be, we need to be careful not to oversell it. After all, there are some flaws with the program’s design that will limit the amount of help it can provide the most financially distressed student loan borrowers. Fortunately for borrowers, the Department has already agreed to fix a few key problems that were included in the original regulations — such as one that would have required married borrowers to make much higher monthly loan payments than unmarried ones in identical circumstances. But more needs to be done.

In addition, the availability of IBR should not distract us from our efforts to expand the safety net. The most vulnerable borrowers and those harmed by unscrupulous schools should be able to get immediate relief through bankruptcy and targeted administrative discharges rather than having to wait 25 years or more to get some relief. [In fact, there is a dangerous trend in bankruptcy courts where judges who may have previously granted discharges based on financial hardship are now holding back because they believe borrowers should instead go through 25 years in the IBR or ICR plans.]

Here are some of the program’s main limitations:

• It doesn’t provide any help to borrowers with low incomes who have taken on unmanageable levels of high cost private student loan debt. Although the Department of Education considers private student loan regulation outside of its jurisdiction, these borrowers are desperately in need of the type of flexibility that IBR provides because their lenders have failed to step it up and offer them any meaningful, long-term repayment assistance.

• The program’s 25 year forgiveness component is not as generous as it initially appears. As is the case with ICR, the amount the government eventually writes off is potentially taxable. If Congress does not address this problem, federal student loan borrowers who have been making payments through the program faithfully for a quarter century will be in for a rude awakening. The path to forgiveness is also unclear at this point but given that not all payments or deferments count toward the 25 year period, it is unlikely that forgiveness will be automatic.

• The repayment program is not immediately available to borrowers in default. Like ICR, borrowers must either rehabilitate their loans or consolidate them in order to make use of IBR. There are some very serious problems with these programs, including Congress’ recent decision to limit rehabilitation to a one-time deal — which will effectively prevent many borrowers from accessing IBR. At the Student Loan Borrower Assistance Project, we believe that the government should allow borrowers in default to move directly into IBR to help them get their debt back into good standing. To make the program even more accessible, we believe that all borrowers in late stage delinquencies should be offered the option of selecting IBR to help prevent them from defaulting.

These limitations should not take away from the importance of IBR. The key is to make sure that borrowers know about the program and understand its pros and cons. This is where quality borrower services come in, hardly a strong point of the student loan industry and the government.

The Department and loan holders must ensure that their staffs are giving accurate information about these programs. We are already hearing from borrowers who are getting misinformation. We need to keep a particularly careful eye on private lenders since they do not have the previous experience of administering the Income Contingent Repayment program. Will they be forthcoming in explaining the IBR option even if it means negative amortization or otherwise very low payments? They are required by law to do this, but who will keep them in line?

At this point, the most important thing is for borrower advocates, financial aid staff, loan holders and collectors, as well as Department of Education employees and contractors to study up on the intricacies of IBR and pass this information on to borrowers. The program will only start to live up to its promise if those who can benefit from it are made fully aware of all of the option.

Deanne Loonin is a staff attorney with the National Consumer Law Center and the director of the center’s Student Loan Borrower Assistance Project. She focuses on consumer credit issues generally and more specifically on student loans, credit counseling, and credit discrimination. She is the principal author of numerous publications, including “Too Small to Help: The Plight of Financially Distressed Private Student Loan Borrowers,” and “Income-Based Repayment: Making it Work for Student Loan Borrowers.” Her views are her own and do not necessarily reflect those of the New America Foundation.