Thousands of struggling borrowers are falling out of income-driven student-loan repayment plans because they’re not filing their annual income documentation on time, Education Department officials revealed on Wednesday. And many of those borrowers are falling behind on their loans as a result.
Over the course of a yearlong period from 2013 to 2014, almost 700,000 borrowers who had enrolled in income-based plans — 57 percent of the total — failed to “certify” their income by the deadline. That lapse sent the borrowers into standard repayment, where their monthly loan bills were higher, sometimes significantly so.
While roughly a third of the borrowers who missed the deadline re-enrolled in income-driven plans within six months, a third went into a hardship-related forbearance or deferment, and some 15 percent became delinquent on their debt, according to the officials, who spoke at a rule-making session here. (And that’s just the borrowers with direct loans. Borrowers with loans made under the old bank-based lending program missed the deadline about 40 percent of the time, according to loan servicers sitting on the rule-making committee.)
Those statistics are bad news for the Obama administration, which has been promoting income-driven plans as a way to keep borrowers out of default. Over the past couple of years, the department has sent emails to millions of delinquent borrowers, encouraging them to apply for income-based plans. The agency has also joined forces with Intuit and H&R Block to educate taxpayers about their repayment options. While enrollment in the plans remains below the administration’s projections, it’s up significantly from two years ago.
So why are so many borrowers missing the deadline? One reason may be that they’re ignoring or overlooking the renewal notices that servicers are required to send 60 to 90 days before the paperwork is due. While some servicers send out letters with brightly colored warnings like “time-sensitive” and “rush,” others send generic emails that give little indication of the urgency of the task.
Suzanne Martindale, a lawyer with the Consumers Union who serves on the rule-making committee, said her own renewal notice came in an email with the subject header “a new message is waiting for you to view.” It was only after clicking through two pages that she got to the electronic reminder.
Ms. Martindale confessed that she had missed the due date herself. “It is easy for people trying to stay on top of things to miss their deadlines,” she said.
Vanishing Borrowers
Another explanation may be that servicers are losing track of some borrowers. In one recent sample taken by the Education Department, the addresses of nearly 20 percent of borrowers in direct lending or the bank-based program were either out of date or missing. In most cases, servicers were using the address at which the borrower lived when taking out the loan; for 4 percent of borrowers, no address whatsoever was on file.
Will Shaffner is director of government relations for the Higher Education Loan Authority of Missouri, known as Mohela, and is one of two loan-servicer representatives on the panel. He said that “nine times out of 10,” when a borrower misses the deadline, “we can’t connect with the borrower.”
In an effort to reduce the attrition rate in income-based plans, the Education Department is preparing to test new ways of communicating with borrowers. A pilot program, which starts this month, will begin when the department sends borrowers reminders after their servicers’ notifications go out. Later, the department will take over the process altogether, to see if government-branded emails and texts are more effective than those sent by servicers. The agency is working with social and behavioral scientists at the White House to craft its messages.
Meanwhile, President Obama has directed the Education and Treasury Departments to study ways to automate the renewal process. His “Student Loan Bill of Rights,” released last month, calls for a report on “the feasibility of developing a system to give borrowers the opportunity to authorize the Internal Revenue Service to release income information for multiple years.”
The effort to retain more borrowers in income-based plans comes as the rule-making panel is considering ways to expand Pay as You Earn, the most generous of the income-based repayment plans, while better directing the program at needier borrowers. On Tuesday negotiators for the Education Department offered a proposal to eliminate the program’s payment cap and to limit the amount of interest that can accrue when a borrower’s payment is insufficient to cover interest. The draft plan would also require borrowers with higher-balance loans to repay their debt for 25 years, rather than 20, before qualifying for loan forgiveness.
Artificial ‘Cliff’
Nearly everyone on the panel supported the first two changes, which would force higher-income borrowers to pay more and would protect lower-income borrowers from ballooning loan balances. The third change, which would create two tiers of loan forgiveness, was much less popular. Several negotiators warned that requiring borrowers with larger debt burdens to pay for a longer period of time would punish low-income students who must borrow for their education and would create an artificial repayment “cliff.”
“If you’re one dollar over the limit, you suddenly have a radically different repayment picture,” said Samuel Levine, of the Illinois attorney general’s office. “That’s not equitable.”
Gail McLarnon, the department’s negotiator, argued that the two-tiered forgiveness system would discourage students from overborrowing and would encourage colleges (particularly graduate schools) to restrain their tuition growth.
The way the plan works now, “there’s no incentive for schools to hold down tuition and no incentive for students to borrow less,” she said. “This is one way you address that.”
The panel will wrap up its negotiations on Thursday and meet for a final session at the end of the month.
Kelly Field is a senior reporter covering federal higher-education policy. Contact her at kelly.field@chronicle.com. Or follow her on Twitter @kfieldCHE.
