Income Driven Repayment Fails to Attract Significant Sign-Ups from Broke Students

NEW YORK (MainStreet) — Income-driven repayment plans enable borrowers who are struggling with federal student loans to reduce their payments and the risk of default. But many people who could benefit are staying away, despite the Obama administration's calls for people to get with the program. As Obama stated in a March 10 speech at Georgia Tech, "If you don't already know about the income-based repayment program, you need to learn about it, because it’s still under-utilized."

Six months later, little has changed. On August 17, the Consumer Financial Protection Bureau (CFPB) began an investigation to find out why.

Millions of borrowers are delinquent or in default, and policy makers fear that this could act as a brake on the economy that Millennials are struggling to enter. A defining problem seems to be that borrowers who have already entered income-drive payment plans are failing to re-enroll on time.

Borrowers in the Income Based Repayment (IBR) and the Pay As You Earn (PAYE) programs must submit income information found on their tax returns every 12 months to prove that they qualify, a process known as re-certification. Industry observers recommend that borrowers constact the loan servicer two to three months in advance, obtain the date when the recertification filing has to be complete and get everything in writing. Borrowers have been kicked out of IBR for filings the omitted a single page from their application—and not getting an explanation from their servicer.


Because lenders and loan servicers are not required to release a certification tally, the CFPB has no way of knowing how many borrowers failed to re-certify on time--or got jobbed when their loan servicer failed to process their applications on time or screwed up their paper work. The CFPB has received over 30,000 such complaints thus far in 2015.

Enrollment among borrowers has increased two-fold in the last two years. Nearly all borrowers with Federal student loans are eligible to have their monthly payments reduced if their earnings are low in relation to their student loan balances. Earlier this year, the Department of Education (ED) released public information for the first time about recent re-certification rates. 57% of all the borrowers in its sample missed their recertification deadlines.

"When borrowers don't certify on time, their payments will snap back to the amount they would have owed under the standard ten-year repayment plan--a jump of hundreds of dollars a month, in many cases," said Seth Frotman, the CFPB's acting student loan ombudsman in an August 17 blog. "This can be a shock to those already struggling to make these payments."


A downside to IBR is that it extends to term of the loan, which makes it more expensive in the long run than the standard ten-year term. But reduced payments are essential for many borrowers to stay current.

Defaulting on a Federal student loan is ill-advised--eventually, the borrower gets dunned. "The amount paid under administrative wage garnishment is almost always higher than the amount paid under IBR," said Mark Kantrowitz, senior vice president and publisher of Edvisors.com. Garnishments involving the PAYE program are more onerous. "It is a bit of a mystery why borrowers default instead of signing up for IBR."

The barriers run the gamut. One, Kantrowitz said, is "the complexity of signing up for IBR and providing annual income information." He added that "some defaulted borrowers think that there is something illegitimate about their loans and they are resistant to reaffirming the debt, since signing up for IBR involves signing a new promissory note."

Then there's the gap between borrowers who drop out and those that graduate. "Borrowers who drop out of college are four times more likely to default than borrowers who graduate, and represent 63% of the defaults," Kantrowitz noted. "Borrowers who graduate go through exit counseling and are aware of their repayment options. Borrowers who drop out don’t go through exit counseling. They may also think that they shouldn’t have to repay their loans because of their dissatisfaction with the quality of education or remorse about borrowing a more expensive loan."

IBR is made difficult, said Andrew Josuweit, CEO of Student Loan Hero, because "it is confusing for the consumer to decide which repayment plan is right for them, or even if it's a smart financial decision and the sign-up process for the consumer is terrible.”

But the wild card is the role of the student loan servicers.

Josuweit also noted the wide-spread belief that student loan servicing agencies are doing a sub-par job with application intake and processing. The four major loan servicers with ED contracts are Navient (formerly known as Sallie Mae), Great Lakes, Nelnet and PHEAA, whose federal student loan servicing arm is called FedLoan Servicing.

"According to the feedback we have received, it can take between 30 and 90 days for processing applications," Josuweit said. "Also, the IRS income verification tool doesn't always work to obtain your financial statements when applying online."

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