Updated Income-Driven Repayment Plan Should Help When Student Loan Payments Resume

At some point this year, borrowers will likely be required to start repaying their federal student loans for the first time in three years, as the pandemic-related pause on payments, interest accrual, and collections on defaulted loans comes to an end. Despite the lengthy respite, many borrowers surveyed in late 2022 signaled financial distress that may make the transition into repayment challenging. With less financial security and greater volatility in expenses, borrowers most at risk of falling behind would benefit greatly from rapid implementation of the U.S. Department of Education’s proposed reforms to repayment.

The pause is set to expire 60 days after the U.S. Supreme Court rules on the Biden administration’s forgiveness proposal, or on June 30, 2023, whichever comes first. Even if the proposal is allowed to move forward, experts estimate that nearly 70% of the total volume of loans will still be outstanding. Indicating the precarious state of finances for many borrowers, the survey findings highlight the importance of establishing protections—before repayment starts—for those who may struggle to afford payments. Among the steps that would help more people stay on track are proposed changes to one of the federal income-driven repayment (IDR) plans that make payments more affordable for most borrowers.

The follow-up survey, conducted in November 2022 for The Pew Charitable Trusts by opinion and market research company SSRS, recontacted respondents from a 2021 survey and found that borrowers felt less financially secure than they did when first surveyed the previous year.

This decline in financial security likely reflects persistent inflation and the expiration of pandemic relief efforts—such as the expanded Child Tax Credit—since these borrowers were last surveyed. Additionally, other temporary relief measures—such as automatic Medicaid enrollment and expanded Supplemental Nutrition Assistance Program (SNAP) benefits—have recently expired, which could mean further reductions in financial security.

At a time of increased delinquencies on credit card debt and auto loans, especially among student loan borrowers, the department must consider the financial landscape that borrowers will face as they reshuffle finances to make required payments on student loans for the first time in three years.

The department has released promising proposed revisions to one of its IDR plans, which would allow borrowers to make monthly payments based on their income and family size. Changes to the Revised Pay As You Earn (REPAYE) plan would make payments more affordable for qualifying borrowers. In addition, a much larger share of low-income borrowers would be exempt from making payments while remaining in good standing on their loans. For borrowers who qualify, the ability to make payments as low as $0 helps them continue to qualify for forgiveness of their remaining balances after a certain number of years.

Related changes will also automatically place borrowers who have already shared income information with the department and who have missed payments for 75 days into an IDR plan. That should help more borrowers avoid default and its associated consequences. The implementation timeline for these changes, however, is still unclear.

The survey findings indicate that putting the changes in place before payments restart will be critical to create a smooth transition. The department will need to disseminate plan details and eligibility information to borrowers and servicers as soon as possible so that those who wish to enroll will have time to do so before payments resume.

The department also should:

• Work to reform the student loan default system. If struggling borrowers fall behind and eventually default, they should interact with a system that works to help them get back to current status, instead of one that creates further financial precarity. As the department moves to reform components of the default system, policymakers should align default and IDR payment obligations wherever possible to make it easier for borrowers to exit default using an IDR plan.
• Implement the Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act this summer, the previously announced deadline. Data sharing facilitated by the law will be key in maximizing the IDR reforms’ benefits. Enrollment and retention will be eased going forward, and delinquent borrowers will be better able to be automatically placed in an IDR plan after 75 days of delinquency. Borrowers should be provided as many opportunities as possible to opt into data sharing to best take advantage of streamlined processes.
• Monitor repayment outcomes to help target additional outreach to struggling borrowers in the first few months after payments resume. Earlier Pew research found that borrowers who fall behind on their payments and take no repayment action during the first three months are 2.5 times more likely to default on their loans at some point in the future.

The 2022 survey was conducted for The Pew Charitable Trusts by SSRS, an independent research company, online through the SSRS Opinion Panel. Interviews were conducted Nov. 17-30, 2022, among a recontact sample of 909 respondents. The margin of error with design effect for all respondents is +/-4.5 percentage points at the 95% confidence level. The 2021 survey was conducted May 10-June 16, 2021, among a representative sample of 2,806 respondents. The margin of error with design effect for all respondents is +/-3 percentage points at the 95% confidence level. Estimates included in this piece reflect a subsample of the 909 borrowers who answered both surveys.

Lexi West works on The Pew Charitable Trusts’ project on student borrower success.