Income-driven repayment, or IDR, plans are a lifeline for millions of student-loan borrowers across the country. These plans cap borrowers’ monthly payments at an affordable percentage of their income and provide forgiveness of any remaining amounts after at least 20 years in repayment or half that for those in public service jobs. For struggling borrowers, the guarantee of an affordable payment is often their best option for long-term repayment success. It’s no surprise that nearly 4.9 million direct loan borrowers, owing a collective $247 billion, participate in an IDR plan.
Unfortunately, IDR plans have one major flaw: the need to annually reapply each year. This seemingly minor paperwork issue trips up nearly 60 percent of student-loan borrowers and results in potentially dire consequences. Reapplication is a hidden trap in IDR plans—a complication that threatens the effectiveness of America’s best solution for helping struggling student-loan borrowers.
Fortunately, the reapplication trap can be fixed easily and without congressional action. The U.S. Department of Education and the Internal Revenue Service, or IRS, could create a streamlined process for borrowers to automatically share necessary income data each year. The resulting change would eliminate payment shocks and paperwork headaches for most borrowers and would allow student-loan servicers to redirect resources to individuals who are on the cusp of default. The creation of a multiyear authorization process would be a long overdue win-win for everyone in the student-loan system.
Why borrowers have to reapply every year and how the process works
Income-driven repayment plans for student loans require annual reapplication because they are more individualized than a typical repayment option. Under a typical payment plan, borrowers either make equal monthly payments to retire their debt over a set period of time, typically 10 years, or they follow an escalating payment schedule in which the amount they owe gradually increases at a set rate over time. By contrast, IDR formulas directly link what borrowers pay to how much they earn. Consequently, borrowers on IDR plans owe a monthly amount that reflects their individual circumstances.
In order to tie borrowers’ payments to their incomes, the federal government needs to have a recent picture of their earnings. As a result, the U.S. Department of Education requires borrowers on IDR plans to annually update the information on their earnings and household size—the variables needed to calculate monthly payments.
Here is where the complication arises. To get this updated information each year, the Department of Education essentially treats borrowers as if they are starting from square one. This means completing the same 12 page, nearly 30-question form, including a question that asks them to select a payment plan. It also requires borrowers to either submit documentation showing their income or log into a special website where they can transfer their data from the Internal Revenue Service to the Department of Education. Borrowers must complete this process even if there are no changes in their circumstances from year to year.
Student-loan servicers have to go through this paperwork headache every year too. They must process forms, ensure that they are properly filled out, and make necessary adjustments. They also must remind borrowers of the need to reapply, which can take the form of repeated letters, emails, and phone calls.
The consequences of failing to reapply
Failing to reapply for IDR plans on time can have dire consequences for borrowers. Without information to calculate a payment based on their income, federal law requires borrowers to make monthly payments equal to what it would take to pay the loan off over 10 years. In the worst scenarios, that means the difference between paying nothing versus hundreds of dollars each month. For others, it might mean doubling or tripling their payments. Even scarier, borrowers who have payments automatically deducted from their bank account may get a nasty surprise when an unexpectedly large sum gets taken out.
Borrowers who fail to reapply for income-based repayment not only pay more each month, but the overall amount that they owe may go up as well. This is because when a borrower fails to reapply on time, any interest that accumulated is automatically added to their total balance—a process known as capitalization. This higher balance immediately increases the amount borrowers must pay to retire their debt. It may also worsen tax complications down the line. Currently, borrowers who receive student-loan forgiveness after 20 years or 25 years in repayment may have to pay taxes on the amount forgiven. Adding interest to a borrower’s balance makes the forgiven amount bigger, meaning the borrower might have to pay more to the IRS.
Though the consequences are not as severe, the annual reapplication process can create challenges for servicers and schools too. For servicers, it means devoting time and resources to process paperwork every year for borrowers who might not otherwise need help. That can take away funds that could be spent getting other borrowers into income-driven repayment or reaching out to those on the cusp of default. Issues with reapplication may be bad for higher education institutions too. A borrower who slips out of the IDR program may become delinquent and default, hurting the institution’s overall default rate. And if that number gets too high, the school may lose access to federal financial aid.
Sadly, a majority of borrowers appear to fall into the renewal trap in one form or another. Department of Education data released in 2015 show that 57 percent of borrowers on an income-driven plan failed to reapply on time. Around a third of these individuals ended up in hardship status, in which they pause their loan payments instead of making progress toward forgiveness.
Recertification problems can also compound existing difficulty in getting delinquent borrowers into IDR plans. According to data from one servicer, only about one-third of severely delinquent borrowers who appear to qualify for IDR take the steps to enroll in one of these plans. And one-third of this subset of borrowers did not successfully recertify on time even after an average of 40 contact attempts. The ability of IDR to help delinquent borrowers experience long-term repayment success will not work if they cannot easily stay on these plans.
A better solution: Multiyear authorization
The onerous reapplication process does not have to be this way. All of these headaches could be fixed with a simple solution that does not even need Congress’ approval: a multiyear application form.
Instead of completing paperwork every year, borrowers could fill out a form that authorizes the IRS to automatically share data that they provide on their tax returns to the Department of Education for at least the next five years. With such a system, the Department of Education would automatically get the necessary data for IDR reapplication each year, allowing it to calculate the new payment amounts without going back to borrowers.
This change would dramatically reduce the complexity of repaying student loans. Borrowers would no longer have to worry about paperwork deadlines, eliminating their risk of suddenly facing unaffordable payments. Servicers, meanwhile, would save significant resources that are currently spent tracking down all of the borrowers in IDR plans to get them to fill out paperwork each year. This time and money could then be redirected to borrowers who are severely delinquent and at risk of defaulting.
Admittedly, some borrowers would not benefit from this automatic process. But they would be no worse off. For example, borrowers whose earnings changed dramatically from their last tax return would need to submit alternative proof of their income, just as they do today. Similarly, borrowers who get married or divorced would need to update their personal information to authorize the automatic calculation, as would someone with a change in their number of dependents.
Multiyear authorization is possible
It is particularly striking that multiyear authorization for IDR used to be an option for borrowers. Until 2007, borrowers on an IDR plan known as income-contingent repayment could authorize the IRS to share their data for up to five years. All they had to do was fill out a one-page form with their name, social security number, and signature—as well as their spouse’s information, if applicable. Unfortunately, the federal government stopped using the form in 2012.
Fortunately, it would not require an act of Congress to bring back multiyear authorization. A 2015 report from the Department of Education with joint recommendations from the U.S. Department of the Treasury noted that such a process could be established again. All it would take is sufficient funding for the IRS. Nowhere in the document did either department indicate the need for any other congressional action. This raises the possibility that the multiyear authorization process could be conducted cheaply enough that the Department of Education could offset the cost.
Under the current system, many student-loan borrowers do not make it into an income-driven repayment plan. They struggle to repay their loans and may end up in a repayment purgatory where they don’t default but also make no progress toward getting rid of their debt.
It should not be this way. Income-driven repayment plans are the Obama administration’s signature accomplishment on improving student-loan repayment. Today, more than 1 in 5 direct loan borrowers in repayment and nearly 2 in 5 direct loan dollars in repayment are using an IDR plan. And these numbers keep growing: The number of borrowers and loan dollars in an IDR plan doubled in the past two years alone.
But simply getting borrowers to enroll in these programs for the first time cannot be the end of the conversation. Long-term repayment success requires ensuring that borrowers can access and stay in an IDR plan. Accomplishing that goal means eliminating wasteful paperwork complications and getting rid of the reapplication trap.