Pew Commends Department of Education’s Efforts to Reform Income-Driven Repayment

Income-Driven Repayment Reforms Would Help Borrowers

In January 2023, the Department of Education published a Notice of Proposed Rulemaking to reform income-driven repayment (IDR) plans, proposing updates to the Revised Pay as You Earn (REPAYE) plan to better meet the needs of struggling student loan borrowers. The Pew Charitable Trusts commented on this rule, applauding the department for taking evidence-driven steps to enhance IDR. Once finalized, the proposed improvements will make IDR more affordable, simplify enrollment, and limit the pitfalls of balance growth from accruing interest. Each of these improvements is supported by Pew research.

 

Although IDR plans have made repayment easier for many borrowers, research has found significant barriers that continue to prevent many from enrolling. Prior to the current pause on repayment, many low-income borrowers were not enrolled in an IDR plan despite such plans’ potential for lower payments. Pew focus groups found that some borrowers experienced challenges enrolling in an IDR plan, and that even people who were able to enroll were discouraged by growing balances and payments that remained unaffordable for them. Pew surveys have revealed that many borrowers (61%) enroll in IDR plans for a lower payment, yet 47% of those previously or currently enrolled reported a monthly payment that was too high. Additionally, 72% of borrowers who had ever enrolled in an IDR plan reported owing more or approximately the same as what they had originally borrowed, compared with 43% of borrowers who were never enrolled.

The department’s proposed rule will address these issues by making repayment system changes to include:

  • Improving affordability for struggling borrowers: The revised REPAYE plan would lower the amount of discretionary income that borrowers are required to repay from 10% to 5% and increase the amount of income protected from 150% to 225% of the federal poverty level. Adjusting both of these components will increase the number of borrowers with a calculated $0 payment and substantially lower payments for other enrolled borrowers, as modeled by Pew.
  • Limiting balance growth: Under the current plan, a borrower’s monthly payment may not cover the full amount of interest accrued each month, leading to balance growth that, per focus groups, can cause frustration and undermine persistent plan enrollment. Expanding interest subsidies so that borrowers are not charged any remaining interest after they make their monthly IDR payments would help ensure that borrowers enrolled in the revised REPAYE plan and making monthly payments would not see their balance increase.
  • Simplifying enrollment: Sunsetting several existing IDR plans that have less favorable terms than the revised REPAYE plan would make it easier for borrowers to select a plan. Consolidating IDR plans would also make it easier for servicers to communicate these plans’ benefits to borrowers and help them successfully enroll.

    The department also proposes automatically enrolling borrowers who are 75 days delinquent on their student loans into an IDR plan. This would require implementing the Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act, passed into law in 2019, which allows the Department of Education and the Internal Revenue Service to share privacy-protected information about borrower income to simplify the enrollment process. Automatic enrollment will help delinquent borrowers, who may not be aware of IDR’s availability, to connect with a plan and avoid the negative consequences of credit reporting that are initiated after 90 days of delinquency.
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