The Department of Education can Protect Borrowers at Risk of Defaulting on their Student Loans

As described in this blog post, the changes suggested in this attached document would create a provision in the “procedures” section of the Department of Education’s suggested regulatory text, as part of the ongoing negotiated rulemaking process, to automatically enroll delinquent borrowers into an income-driven repayment plan.

This fall, the Department of Education is undertaking a negotiated rulemaking process to reform the regulations governing a number of higher education-related programs focused on affordability and student loans. One of the programs on the docket is income-driven repayment (IDR), a suite of plans through which borrowers can repay their student loans. These plans tie borrowers’ monthly payments to their incomes and family sizes, are often more affordable, and result in enrolled borrowers defaulting at much lower rates than their peers in other repayment plans.

The current IDR landscape is beset by administrative and structural challenges, including:

• Unaffordable payments: While IDR plans lower payments for many, under the current formula, IDR payments can still be too high for some borrowers, in part because they don’t take into account other aspects of family finances. For example, borrowers may also have private student loans, medical costs, or other expenses that are not factored into the income-driven payment calculation.
• Balance growth: While a lower income-driven payment can be more affordable month to month, many borrowers watch their balances grow under IDR if their payments do not cover the interest that accrues and capitalizes on their student loans. Although there is a light at the end of the tunnel—any debt that remains after 20-25 years (depending on the plan) of income-driven payments is discharged—the financial and psychological toll of making regular monthly payments far into the future while sitting on a ballooning debt balance can discourage engagement with the repayment system and lead to borrowers paying much more over the life of their loans.
• Lack of access: Many borrowers face barriers to enrolling and remaining enrolled in an IDR plan, due to confusing and burdensome administrative requirements and the complexity of the system. (For example, there are currently five different IDR plans, each with different eligibility requirements, costs, and benefits.) As a result, some borrowers who would benefit from an IDR plan are not using one. In addition, not all borrowers—including those who struggle most with repayment—have access to the program.

In particular, Black borrowers hold higher student loan balances and repayment burdens, are disproportionately harmed by student loan debt and existing IDR formulas, and are less likely to be paying down principal compared to White and Latinx borrowers.

As a result of these issues, reforming income-driven repayment is (at least) a two-part process, as outlined by the Department in its proposed regulatory text:

• First, we must focus on the structure and design of these plans to ensure borrowers have affordable payments, are able to make progress paying down their balances, and do not remain in debt for extended periods of time.
• Second, we must also ensure the process for enrolling and remaining in these plans is easier for borrowers. If borrowers can’t access income-driven plans, reforms to make the plans more borrower friendly will have been made in vain.

This analysis and suggested regulatory text address the second goal.

Ensuring the income-driven repayment plans are easy to access, use, and remain enrolled in over time

Important steps have already been taken to facilitate access to income-driven plans. If implemented effectively, the 2019 Fostering Undergraduate Talent by Unlocking Resources for Education Act (FUTURE Act) has the potential to streamline repayment for millions of current and future borrowers. The FUTURE Act facilitates the secure sharing of relevant data between the Internal Revenue Service (IRS) and the Department of Education. Among other issues, this data-sharing is intended to streamline the application and annual recertification processes for income-driven repayment plans.

Currently, in order to apply or recertify for an income-driven repayment plan, a borrower needs to submit income and family size information to the Department of Education. This creates a duplicative process for those whose tax data are already on file with the IRS. Research indicates that the information-sharing process can create a barrier to enrollment for borrowers. While some borrowers could use the IRS Data Retrieval Tool to transfer tax information directly into their applications, the FUTURE Act would make this transfer automatic (for those who consent to have their data shared), reducing obstacles to accessing affordable payments. In addition, it would also verify that no taxes were filed.

As part of the required coordination, according to the FUTURE Act, the IRS must share relevant borrower data with the Department of Education “only for the purpose of (and to the extent necessary in) determining eligibility for, or repayment obligations under, income-contingent or income-based repayment plans.” While the law requires these data to be used to determine eligibility and calculate payments, it does not require that the sharing of these data mandate enrollment into such plans. Instead, the law requires that the Department of Education “establish and implement…procedures” to use this tax information to “determine repayment obligation of the borrower without further action by the borrower.” These provisions apply to a borrower who “selects, or is required to repay such loan pursuant to, an income-contingent repayment plan; or recertifies income or family size under such plan.”

As it considers reforms to income-driven repayment plans as part of the current negotiated rulemaking process, the Department has indicated a desire to preserve flexibility for the ongoing implementation of the FUTURE Act in the “(l) Procedures” section of its proposed regulatory text (also outlined below). In doing so, it should include two important provisions:

• It should separate consent for data-sharing and enrollment into an income-driven plan, as allowed under the law. In the “procedures” section of its proposed regulatory text, the Department is allowing borrowers to opt into data-sharing in early interactions with the Department and later to opt into an income-driven repayment plan. This separation should be designed to allow the Department and servicers to inform borrowers not enrolled in an income-driven plan what their payments would be if they were to enroll, which will be particularly meaningful for those eligible to make low or $0 payments. (For existing borrowers, the Department could collect consent for data sharing in multiple ways, including allowing borrowers to opt in by making a selection via their online accounts and when they enroll in or recertify for income-driven plans.)
• The Department should also go a step further in helping borrowers avoid the severe consequences of defaulting on their loans: Borrowers should also be permitted to opt into being automatically enrolled in an income-driven repayment plan if they become significantly delinquent (i.e., miss a certain number of payments) on their loans. The Department’s proposed regulatory text does not allow for auto-enrollment.

The changes suggested in this attached document would create a provision in the “procedures” section of the Department’s suggested regulatory text to automatically enroll delinquent borrowers into an income-driven repayment plan. (While this is an important path forward for helping those struggling to repay their loans, importantly, automatic enrollment of delinquent borrowers in income-driven plans should also be codified in statute.)

This piece is adapted from previous work published by New America and Brookings.

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