The menu of repayment options available for struggling borrowers is a key benefit of taking out federal instead of private student loans, but new data show that many students aren’t taking advantage of the government’s programs.
The details come from the Consumer Financial Protection Bureau’s student loan ombudsman, Rohit Chopra, who posted an interesting breakdown of the $1 trillion in outstanding federal student loans. He found that two-thirds of all direct-loan borrowers are on the standard 10-year payment plan; the remaining third are in one of the special plans that are supposed to help borrowers manage their monthly payments. About two-thirds of those people are in plans that either extend the term of their loan or start the monthly payments small but increase them over time, or some combination of those options. They can make loans more affordable in the short term, but they increase how much total interest a borrower pays over the life of the loan.
Just 3 out of 10 borrowers in the repayment plans are getting the kind of help that pegs a borrower’s payment to his or her monthly income. These income-based repayment plans (known as IBR) are generally praised by student advocates for making loans affordable and because they forgive the remaining balance after 10, 20, or 25 years, depending on the program. Chopra found that given the average amount borrowers in each program owed, “it’s possible that many borrowers in plans not based on income might be better off with an income-based plan.”
So why aren’t more students using the IBR plans? Chopra says it’s because borrowers don’t know about them and enrollment isn’t as easy as it could be. Publicizing the programs is largely up to the loan servicers that collect monthly payments and are supposed to work with borrowers in trouble. Yet two-thirds of borrowers surveyed by the National Consumer Law Center a year ago said (PDF) that they didn’t hear from their loan servicers before they defaulted on their debt. As Inside Higher Ed has reported, enrolling in IBR can be complicated, and as Bloomberg News revealed last year, servicers haven’t necessarily been compensated properly to encourage them to put in the extra work.
Two recent changes could improve the situation: The White House streamlined the IBR enrollment process by making it easier to apply online, and in March of this year, President Obama restructured how the government pays student loan servicers to make putting students in IBR programs more attractive. But there are still other potential fixes, including one pushed by the NCLC: automatically enrolling every borrower who falls behind on a loan in some form of income-based repayment. As we know from a host of research, inertia is powerful, so default options become the most common ones. And as the new data show, for many students, that would be a good thing.