Pew Calculates Potential Effects of Income-Driven Repayment Reform to Assist Department of Education Negotiations

Potential Effects of Income-Driven Repayment Reform

The week of Oct. 4, 2021, the U.S. Department of Education began the first of three negotiated rule-making sessions to consider several important federal financial aid issues, including student loan debt repayment challenges. A critical topic of discussion is the reform of income-driven repayment (IDR) plans, those that link the amount that borrowers must repay monthly to their current income. Pew research has shown that those enrolled in IDR plans often report unaffordable payments, growing balances, and confusing enrollment requirements, despite the plans offering most borrowers affordable payments and reduced risk of delinquency and default. In the first rule-making session, negotiators discussed potential changes to the underlying IDR formula to address some of these challenges.

At the request of Dr. Rajeev Darolia, the negotiated rule-making committee’s economic and higher education data adviser, Pew provided data and calculations to help negotiators understand how various modifications to the IDR formula would alter repayment requirements and could affect borrower outcomes. In the letter sent to Darolia on November 1, 2021, Pew calculates potential changes considered by the negotiated rule-making committee using REPAYE—the newest and most generous income-driven repayment plan—as a baseline for analysis. Under REPAYE, payments are set at 10% of a borrower’s discretionary income, with 150% of income relative to the federal poverty level exempted from the payment calculation. Payments are required for 240 months for undergraduate borrowers and 300 months for graduate borrowers, unless borrowers pay off their loans earlier, with the remainder of loan balances after that time period forgiven.

The three reform options evaluated by Pew in the letter are:

  1. Lowering the percentage of discretionary income used to calculate payments.
  2. Increasing the amount of income protected from the payment calculation.
  3. Limiting interest accrual in IDR plans to that which borrowers would accumulate if they were enrolled in a standard (10 year) repayment plan.

Income-driven plans are an important tool that can help borrowers avoid delinquency and default, and enrollment in such plans has increased substantially over the past decade. However, research suggests that they can be improved to help make payments more affordable for struggling borrowers and to reduce balance growth across the federal student loan portfolio. The reforms modeled in the letter are a few of many potential options that negotiators might consider throughout this fall’s rule-making sessions, which could be implemented individually or in combination to amplify the benefit to borrowers. As policymakers move forward with reforms, they should weigh the benefits and drawbacks of how different plan design approaches would affect those most likely to be delinquent or in default on their loans, many of whom have low incomes.

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