Which Policy Solutions Can Help At-Risk Student Borrowers?

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Higher education is a powerful path toward upward economic mobility, especially for Americans at the lowest rung of the income ladder, and federal student loans can be an effective tool for increasing access to postsecondary education. However, many researchers, advocates, and servicers—companies that have contracts with the federal government to handle student loan billing and payments, among other responsibilities—acknowledge problems with the repayment system.

The first and second pieces in this series highlighted discussions of why some borrowers struggle to repay their loans and who is most at risk for default or delinquency. The final conversation—which featured Pauline Abernathy, previously of the Institute for College Access and Success, Seth Frotman of the Consumer Financial Protection Bureau, Jason Delisle of the American Enterprise Institute, and moderator Travis Plunkett of Pew—examined the available repayment solutions in greater detail.

Abernathy began by providing an overview of income-driven repayment (IDR) programs—plans that base monthly payments on borrower income and offer debt forgiveness after 20 to 25 years if certain conditions are met—which she indicated are used by 20 percent of student loan borrowers. She noted that these plans make a substantial positive difference for many struggling borrowers; enrollees have lower levels of delinquency than other groups, though she cautioned that breakdowns in the repayment process and the complexity and number of plan options are problematic. Despite these concerns and in light of the benefits these plans can provide to those at risk of delinquency and default, she pointed to the proposed federal Streamlining Income-Driven, Manageable Payments on Loans for Education (SIMPLE) Act—which would automatically enroll severely delinquent borrowers in IDR plans and automate the annual income recertification process—as a possible solution to many repayment challenges. (At the time of the panel discussion, the SIMPLE Act had been introduced in the 114th Congress. Versions of the act have since been proposed in both chambers of the 115th Congress.)

Frotman echoed many of Abernathy’s comments and cited the need for a wider focus. He emphasized that borrowers may be struggling financially overall, not only with student loans.

Delisle, however, questioned whether IDR plans offer an optimal path for repayment. He suggested that existing programs are complex and disproportionately benefit high-balance borrowers because repayment is not based on the amount borrowed. He proposed an alternative system, championed by former Florida Governor Jeb Bush (R) during his recent presidential campaign, that would require borrowers to pay back 1 percent of their income for every $10,000 borrowed from the federal government (up to $50,000) on their income taxes every year for 25 years or until they repaid 175 percent of the original principal. In response, Abernathy underscored the importance of IDR for low-balance borrowers, and Frotman pointed to the need for data, stating that the lack of information on IDR plans can make it difficult to understand whether they are working as intended.

Throughout Pew’s 2016 conversations, panelists agreed about the need for fewer and simpler repayment plans (though some noted that a shorter list of options might still include flawed programs), and for incentives for servicers and schools that align with successful repayment by students. In the weeks and months ahead, Pew will explore these topics, conduct research on student loan repayment, and engage with policymakers and thought leaders in government, the private sector, and the advocacy community. Please check back regularly for new research and policy proposals.

In January 2018, The Pew Charitable Trusts launched the project on student borrower success, a four-year initiative to promote successful repayment of student debt, especially among those borrowers at greatest risk for delinquency and default. This piece is the third in a three-part series reviewing an October 2016 series of expert discussions, hosted by Pew, on the state of student loans in America and outlining important issues in student debt repayment.

Sarah Sattelmeyer is a manager with The Pew Charitable Trusts’ student loan initiatives, and Brian Denten is an associate with the project on student borrower success.