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Robust Income-Driven Repayment Programs Can Help Borrowers Keep Payments Low

Students cheers as the class of 2014 celebrate during the graduation ceremony at Howard University in Washington, on Saturday, May 10, 2014. Rapper and music mogul Sean Combs delivered the commencement address at Howard University on Saturday.

CREDIT: AP/Jose Luis Magana.

Americans are facing a student loan debt crisis. Today, Americans hold over $1.3 trillion in student loan debt, making it the second largest source of U.S. personal debt, surpassed only by mortgage debt. Student debt is particularly burdensome for Americans because of the default expectation that borrowers pay back their loans in a 10-year period; in other countries, borrowers have 20 to 30 years to pay back their loans in much smaller increments, making debt burdens more manageable.

What most federal student loan borrowers don’t know is that they don’t have to stay on that ten-year repayment plan. Many are eligible to change the terms of their payments through income-driven repayment (IDR) plans. While these plans extend the term of payments, they also ensure that payments are capped at a percentage of the borrower’s income—in other words, the less you make, the less you pay on a monthly basis (check out the student loan repayment estimator to see which plan might work best for you). While IDR plans are not a solution for everyone and have eligibility requirements that leave some borrowers behind, they are important tools that make the student loan system more accessible for many borrowers.

Unfortunately student loan servicers don’t often explain the requirements of IDR plans adequately to borrowers. Every 12 months, borrowers in IDR programs are required to resubmit information that verifies their household financial circumstances for the Department of Education to determine payment amounts. Borrowers must submit tax returns or authorize the Department of Education to request official documentation from the IRS. In the case that borrowers fail to recertify, they may face unexpected monthly payment increases of hundreds of dollars. Leaving IDR can also add accumulated interest to the borrowers’ total student debt balance.

Borrowers often have trouble understanding or finding the information they must submit, leading them to miss important deadlines for recertification. The difficulty of the process is demonstrated by data: 57 percent of borrowers fail to recertify on time, according to the Department of Education, and borrowers who missed recertification experienced financial hardship that led to forbearance or deferment at twice the rate of those who recertified.

Yet the IDR system doesn’t have to be governed by such an arduous process. Policymakers have contrived plans to make the recertification process automatic, so borrowers are protected from administrative errors that can prove catastrophic. Their ideas include tying repayments to the payroll tax system, so that payments are directly transferred from paychecks based on income level, and options to make IDR certification eligible for multiple years. Either of these plans would reduce the detriments caused by the current bureaucratic recertification process. Borrowers’ lives are busy enough; let’s afford students the benefit of not having to worry about seeing their bills unexpectedly skyrocket.

To find out more about enrolling in repayment plans based off your income, check out nslds.ed.gov and studentloans.gov and to help make repayment plans better for everyone, share your story with us. If you’re in the Reading, PA area, come to our student debt workshop and roundtable on Tuesday, September 13.

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