Everyone worries about deeply indebted college graduates with poor job prospects. Yet a program that helps those very borrowers, letting them repay their loans on the basis of how much they make, gets little attention.
For a few years now, the government has allowed borrowers whose federal student-loan debt is heavy relative to their income and family size to choose income-based repayment. In that program, they can make smaller monthly payments, and, if they meet certain conditions, the government even forgives their balances, eventually.
When the program began, in 2009, the timing seemed perfect. The economy had slumped, and student-debt levels were on the rise. Those concerns have only increased, but the program, despite its relevance, hasn’t become a household word.
In June the White House announced plans to improve the income-based repayment program, acknowledging what experts on student loans already knew: “Too few responsible borrowers are aware of their repayment options.”
Income-based repayment isn’t for everyone. Most of the 37 million borrowers with outstanding federal student loans are well served by other plans. And not all loans are eligible for the program. It’s best for borrowers who are hard pressed to make full standard payments because their student debt is high relative to their income. For example, a borrower with $30,000 in eligible federal loans with an interest rate of 6.8 percent would pay $345 a month under a standard 10-year repayment plan. If that borrower had an adjusted gross income of $30,000 and a family size of one, he would pay $166 a month under the current version of income-based repayment. Since the borrower’s monthly payment would be lower under income-based repayment, he would be eligible for the program.
But participation in income-based repayment remains low: About 475,000 borrowers were approved for the program by the end of last September. Since then both President Obama and the secretary of education, Arne Duncan, have raised its profile, speaking publicly about the program and introducing changes, such as fast-tracking a plan to lower the level of discretionary income at which monthly payments would be capped. By the end of April, more than 856,000 borrowers had been approved, according to the most recent estimates from the Education Department.
But as many as three million borrowers could probably benefit from the program, estimates Mark Kantrowitz, the financial-aid expert who publishes the Web sites FinAid and Fastweb.
The Education Department isn’t setting any targets, says Ajita R. Talwalker, a senior policy adviser there. Its priorities are giving borrowers the information they need to make a good choice about repayment, she says, and removing hurdles for those who want to be in the income-based program.
Despite its advantages, the program is no silver bullet for borrowers. For one thing, making smaller payments over a longer period means paying more in interest. And income-based repayment is only for federal loans, while many borrowers who struggle the most have private debt, too.
Still, experts all seem to think it’s a good idea, maybe even a game-changer. “Why does anybody default in the day and age of income-based repayment?” asks Justin Draeger, president of the National Association of Student Financial Aid Administrators.
A Last Lesson on Loans
One explanation, as the White House noted, is borrowers’ lack of awareness. Many haven’t heard of the program, and even those who have must jump through hoops to find out if they qualify.
The administration hopes to narrow that information gap, spelling out requirements for servicers of direct loans to inform borrowers about the program before they leave college and again when they begin repayment. Federal officials also plan to give colleges a model for explaining loan-repayment options in students’ exit counseling.
Students tend to go through that counseling, which colleges must offer under federal law, as busy, distracted seniors on the verge of graduation. The financial-aid office often has to pressure them to take part, says Maureen McRae, financial-aid director at Occidental College. “The realization they’ve borrowed money,” she says, “probably hasn’t hit them yet.”
At many colleges, exit counseling is done online. And some of the borrowers most likely to struggle never even speed-click through: They drop out of college before the financial-aid office knows they’re leaving, says Mr. Draeger.
Even for borrowers who do complete their degrees, loan repayment can come at an awkward time, several months after graduation, when many are moving and trying to figure out their next steps. By the time any grace period on their loans is up, most borrowers have little to no interaction with their colleges’ financial-aid offices. Their main points of contact are the servicers of each loan, which lay out their repayment options.
Kerri Padgett had heard about income-based repayment before she finished veterinary school, in 2009, and thought it sounded like a good idea. But getting into the program was “a bit of a mess,” she recalls. She had to navigate a customer-service maze and wait months for her application to be approved.
Despite those frustrations, the program has made a big difference, Dr. Padgett says. She still has to make full monthly payments on her private loans, but being in income-based repayment means reduced monthly balances on her federal loans and “more wiggle room” in her budget, she says, so that an unexpected expense need not derail it.
“I hope more people know about it and take advantage of it,” Dr. Padgett says of the program.
Borrowers who learn about income-based repayment and decide it’s what they want still have their work cut out for them. Federal officials are now trying to streamline the application process, which has drawn many complaints, by letting borrowers whose loans are held by the government prove their incomes by importing tax data from the IRS.
Moves like that, as well as the Obama administration’s plans to raise awareness of the program, are good steps, advocates and experts say. But several suggest bigger changes. Why not make the program opt-out, so that those who would benefit are more likely to participate? And what about making loan repayment automatic, with monthly payments withheld from borrowers’ paychecks?
Behavioral-economics research shows that people typically choose a program that’s easy to understand, says Judith Scott-Clayton, an assistant professor of economics and education at Columbia University’s Teachers College. So relying on borrowers to pick a complex though beneficial program, she says, is problematic.
Policy makers are still sorting out the best way to promote income-based repayment for borrowers with heavy debt relative to their incomes, says Robert M. Shireman, a former deputy under secretary of education. “How do we make sure when they do need it, a sign flashes in front of their face: ‘This helps! Push this button!’?”
Income-based repayment was never meant to be the best option for everybody. But at a time of sustained worries about students’ debt and job options, the program could probably help another couple of million borrowers stay afloat.
