Note: This analysis was updated on Sept. 5, 2019, to reflect the most recently reported number of income-driven repayment plans, federal student loan borrowers, and outstanding student debt in each state as of March 31, 2019.
Some 43 million Americans today hold a collective $1.4 trillion in student loan debt. Millions are severely delinquent on federal loans, meaning they have missed at least three months of payments. Student loan default—the worst-case scenario where people have gone almost a year without making payments—is a reality for 9 million borrowers, about 1 in 5. More than 1 million default each year.
To help reduce those numbers, Congress should require federal agencies to streamline the process for paying off student loans to help struggling borrowers enroll and stay in an affordable repayment plan—and potentially avoid delinquency and default.
The consequences of an inefficient system are significant. For example, being severely delinquent or in default on a loan harms a borrower’s ability to access other forms of credit. Those who default also can face garnishment of wages, Social Security, or other federal payments; withholding of federal income tax refunds; and possible collection fees of up to approximately 25 percent of total principal and interest—all while interest continues to accrue.
Recent research demonstrates that payments tied to a borrower’s income have the potential to mitigate the impact of financial difficulties for borrowers in the longer term: For millions of these borrowers, using an income-driven repayment (IDR) plan can make monthly loan payments more affordable, and help people successfully repay their loans as earnings increase or decrease, by tying the amount owed each month to family size and income.
However, to enroll and remain in these plans, borrowers must recertify annually. Those unable to do so will see their monthly payments increase and their unpaid interest capitalized. That means their interest is added to principal and begins accruing interest itself. These factors can boost the overall size of the loans, undermining borrowers’ ability to make payments and potentially leading to delinquency and default. For example, U.S. Department of Education data from 2013 and 2014 show that more than half of borrowers in IDR plans did not recertify on time.
Today, approximately 30 percent of borrowers in repayment on Direct Loans, the U.S. Department of Education’s federal student loan program, are enrolled in IDR plans. The current annual application process is cumbersome and inefficient, requiring documentation that, in many cases, duplicates income data already supplied to the federal government in annual income tax filings.
One simple and efficient way to directly address IDR enrollment and annual recertification challenges is to have the IRS share relevant taxpayer data—with appropriate privacy protections—with the Department of Education. By streamlining the process for borrowers to enroll and stay in income-driven repayment plans, IRS data sharing can potentially help millions successfully repay their loans and also protect taxpayer investments in higher education. (See map for more information about how many borrowers in each state would be affected by data sharing.) Improved data sharing also lays the foundation for more direct and targeted outreach to those struggling to repay student loans and who might benefit from an IDR plan.
An efficient, flexible, and user-friendly repayment system would promote borrower success: When the system works well, those with loans can select plans that fit their needs, make monthly payments, and access short-term relief when faced with financial shocks or difficulties. But when the system falters and is inefficient, borrowers are more likely to face challenges in repayment.
Notes: Figures are accurate as of March 31, 2019. “Number of federal student loan borrowers” includes the total number of borrowers with Direct Loans, FFEL, and Perkins loans. “Outstanding federal student debt” includes outstanding debt held by borrowers with Direct Loans, FFEL, and Perkins loans; interest on school-held Perkins loans is not included in the totals. “Number in income-driven repayment plans” includes borrowers with Direct Loans and Department of Education-held FFEL who are in income-driven repayment plans. The location of the borrower is reported by the servicer, and the sum of figures in this report may differ slightly from the Direct Loan Portfolio by Delinquency Status report due to rounding, timing, and system differences. Current address is not required to be reported to the U.S. Department of Education by commercial lenders (FFEL or Perkins). This chart does not include borrowers categorized by their servicer as “Other” or “Not Reported.”
Source: Federal Student Aid, “Federal Student Loan Portfolio,” https://studentaid.ed.gov/sa/about/data-center/student/portfolio
Sarah Sattelmeyer is a manager, Rich Williams is an officer, and Brian Denten is a senior associate on The Pew Charitable Trusts’ project on student borrower success.