A new National Consumer Law Center (NCLC) report found that while 8 million Americans are currently enrolled in income-driven repayment plans for student loans, only 32 borrowers have received the forgiveness promised by the program.
The income-driven repayment program, implemented more than 25 years ago, was intended to bring borrowers student loan relief by basing monthly payments on one’s current income and family size, then forgiving any remaining debt after 20 to 25 years of payments. The NCLC report, however, highlights just how hard it is to access the benefits of the program.
2 million borrowers should have received loan forgiveness
The federal income-driven repayment program has existed in some form since 1995, designed to get borrowers completely debt-free after 20 to 25 years. However, the program is optional, and it appears that many borrowers either weren’t aware of the program at its inception or were otherwise steered away. According to the report, 2 million federal student loan borrowers have been in repayment for 20 years and still owe undergraduate student loan debt — 2 million borrowers who, if they were enrolled in IDR plans, should have seen their debt wiped away by now. Instead, only 32 borrowers have seen student loan forgiveness through the program.
According to the report, borrowers who enrolled in the Income-Contingent Repayment Plan (ICR Plan) in 1995 should have received cancellation beginning in 2020, while borrowers who enrolled in ICR and switched to the REPAYE plan when it became available should have received cancellation beginning in 2016. “Put another way,” the report states, “most borrowers who entered ICR in 2000 or earlier should have received complete loan cancellation by now.”
Flawed paths to accessing IDR plans is to blame
The income-driven repayment’s promise is that after 20 to 25 years of on-time and in-full payments, the borrower will receive full forgiveness from the remaining student loan debt. Because these monthly payments are based on your monthly income and family size, the payments are lower than what they would be under a standard repayment plan.
However, the report claims that the primary problem is not with the program itself, but with the accessibility of the program. The report cites “flawed program design, failed implementation by the student loan industry, and ongoing mismanagement by [the U.S. Department of Education]” as the main reasons for the program’s failure.
Some of this blame could fall on student loan servicers, which are responsible for guiding borrowers toward different repayment plans. Servicers may not have adequately advised borrowers about starting or switching plans, leaving many paying more or longer than they should. Some servicers, like Navient, have also been subject to lawsuits alleging misinformation that has steered borrowers away from IDR plans.
Servicers’ failure to properly implement IDR plans particularly impact Black and Latinx borrowers, who already carry a disproportionate burden due to student loans. “A recent analysis of the Federal Reserve’s Survey of Consumer Finances offers new evidence that borrowers of color struggle to benefit from IDR, even as they access this protection at higher rates than their white peers,” the report states. “Even with IDR, Black borrowers continue to default at extraordinarily high rates — a potential result of disparities in recertification.”
Some reforms could be on the way
The NCLC points out that the failure of IDR plans in regard to student loan forgiveness is indicative of major flaws within the program, but that the program is a symptom of a bigger issue with federal student loan forgiveness. “It shows why outright debt cancellation — not tied to IDR — must be part of the Biden Administration’s student loan plan, and why the existing IDR program is not a substitute.” In the meantime, the report suggests an audit of the current program.
Reforms within the IDR program could have major financial impacts. The latest stimulus package passed through Congress features a provision that makes all student loan forgiveness free from federal taxation through 2025. Before this stimulus package passed, any debt forgiven through income-driven repayment was considered to be taxable income, leaving borrowers with potentially thousands of dollars owed by the end of the repayment period even as their debt was forgiven.
If President Biden pursues student loan cancellation, or if reforms to the IDR system include retroactive forgiveness for borrowers who have been misled, borrowers could save thousands of dollars under the new provision. What’s more, Biden has also proposed implementing a new IDR plan that would forgive loans after 20 years, one which all undergraduate loan borrowers would be enrolled in automatically. This automatic enrollment could help more borrowers see forgiveness as promised.