The Call for More Income-Driven Repayment for Student-Loan Debt Grows Louder
Posted By Derek Johnson on November 3, 2016 at 5:30 pm
Earlier this month, a collection of consumer groups, labor unions, and student loan servicers petitioned the Department of Education to automatically re-enroll students in income-driven repayment programs when their tenure expires.
The coalition, including such organizations as the American Civil Liberties Union, the AFL-CIO, the National Consumer Law Center and major loan servicer Navient, addressed a letter to the Department of Education asking for changes to the requirement for yearly disclosure of income and tax information. The groups argue that failing to re-file every year can lead to sudden costly increases for borrowers switched over to default repayment.
By allowing student borrowers to give consent to share this information for multiple years, these groups argue that the government would help keep them from jumping off the programs before they’re ready. “[Income-driven repayment] is a crucial lifeline for many borrowers. By tying loan payments to their income, individuals transitioning to repayment or with otherwise unaffordable debts are better able to stay current and avoid default and the severe consequences associated with it,” the authors write.
Income-driven repayment has become increasingly popular during the past four years, largely through encouragement by the Department of Education and the Obama administration. The number of students taking advantage of these programs has more than doubled since 2014 and now stands at more than 5 million. There is solid evidence that expanded use of income-driven repayment has correlated with lower default and delinquency rates, as well as fewer hardship deferments (borrowers asking to delay their student loan payments due to economic hardship).
Eliminating the need to re-enroll every year would potentially allow even more students to take advantage of these benefits. “Everyone wins under an automatic re-enrollment situation. Borrowers would no longer worry about getting hit with large payment spikes and interest capitalization, while servicers would be able to redirect their resources from IDR re-certification to targeting individual borrowers who are at greater risk of delinquency or default,” the groups write.
Kicking the repayment can down the road
Of course, whether “everyone wins” with more income-driven repayment largely depends on how one defines “winning.” To be sure, there are student borrowers who are either too low-income or unable to secure high-paying jobs right out of college and thus aren’t able to afford monthly payments on the standard 10-year repayment plan.
For these students, deferring a portion of their monthly loan bill is often an economic necessity. However, it’s extremely unlikely that everyone enrolled in IDR plans (nearly 40 percent of all borrowers) fits this definition. Which means an unknown portion of those students actually do have the means to pay their full loan amount but choose to use the program anyway.
That’s because having lower monthly bills is almost always convenient, no matter how high your income level. But it’s important to note that IDR provides short-term benefits at the expense of longer repayment periods and larger debt totals. Even the Department of Education agrees with this interpretation on its page outlining details of the program.
While it is fine for most students to determine for themselves whether this approach offers them the best pathway to economic prosperity, it becomes a problem when these short-term benefits are used to excuse or ignore systemic problems that exist in the modern financial aid system.
How income-driven repayment masks problems
Enrolling more student borrowers into income-driven repayment programs can lessen the immediate financial hit to the wallets of the very same people who should be sounding the alarm about the unacceptable status quo system. After all, if it doesn’t “feel” like student loan payments are that burdensome, then maybe it’s not necessary to put so much pressure on our elected officials to do the hard work of confronting the special interests and fixing the structural issues that make college so expensive.
This logic is what leads to stories about IDR like this one from the New York Times with the first sentence of the piece actually asking “Has the student loan crisis already been solved?” Or reports from the White House that make the ludicrous claim that student debt is actually a net benefit for the economy, while relying on increased IDR enrollment figures to argue that student debt isn’t really all that burdensome.
The full court press in favor of income-driven repayment over the past four years is largely a good-faith effort by the government and experts to address these problems and mitigate harm to those caught up in the worst elements of the status quo. However, proponents are increasingly wielding it as a cure-all tonic, and every day the shift toward a system where IDR is the default repayment method rather than the exception becomes more pronounced.
That’s a problem, because while temporarily reducing loan payments on the front end might throw a bone to low-income students, it does nothing to change the underlying realities that have led to the current student debt crisis. Furthermore, even students with the economic hardship to justify enrolling in income-based programs will end up paying student loan bills well into their late 30’s or early 40’s, at a time when they have new expenses related to family, child care, home ownership and their children’s college savings to worry about.
The need for a bold new world
Students today are still paying far too much for a college degree, borrowing increasing amounts to finance them and attending schools with terrible track records when it comes to proving that their curriculums lead to good-paying jobs in their chosen fields of study. Additionally, as others have pointed out, this is not a sustainable long-term policy as the American taxpayer will wind up picking up increasing amounts of the tab when borrowers discharge the remainder of their loans.
The truth is the financial aid system we use today is badly outdated and wasn’t ever designed for borrowing to be the main avenue of financing higher education. The era of high borrowing and high debt is relatively recent. Roughly 80 percent of all cumulative total student loan debt was accrued in just the last 16 years.
Absent major reform that involves more than simply pumping more money into the financial aid system or state subsidies, tuition and the cost of college will continue to steadily rise, forcing students to go even further into debt for an education that everyone tells them is absolutely essential to their economic survival.
Policymakers are going to need to envision a bold new world to fit the pre-eminent status that higher education has attained in today’s economy. The potential for that new world dims every time short-term fixes are allowed to mask that the problem actually exists.