Law Will Ease Access to Affordable Student Loan Repayment if Implemented Effectively

This analysis was updated on March 4, 2020 to replace the word “consent” with “approval” in several instances to reflect the language used in the law.

Changes intended to help federal student loan borrowers enroll and remain in income-driven repayment (IDR) plans are a less frequently discussed aspect of a significant higher education bill enacted late last year. But the updated procedures could help millions better navigate the system for repaying their higher education debt—depending on how the law is implemented.

The plans, under which monthly payments are calculated based on borrowers’ incomes and family sizes, are often more affordable than other options, and when enrolled, borrowers are less likely to default.

More broadly, legislative analysts estimate that the Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act could save taxpayers $2.8 billion over the next decade. The law also provides permanent funding for Historically Black Colleges and Universities and other Minority Servicing Institutions. In addition, it streamlines the Free Application for Federal Student Aid (FAFSA) that prospective and current students must submit annually to access federal student aid and federal student loans as well as the application process for loan discharges for individuals who are totally and permanently disabled.

The FUTURE Act directs the Internal Revenue Service (IRS) to securely share relevant borrower data with the U.S. Department of Education and has the potential to benefit about 8 million borrowers now enrolled in IDR plans, as well as those who enroll going forward. Data sharing will streamline the burdensome and duplicative income verification requirements for IDR plans, bolster the accuracy of the information used to determine borrowers’ repayment obligations, and reduce improper payments.

The law requires that the secretaries of Education and Treasury submit regular reports to Congress on implementation status, but it includes no effective date and leaves much of the process at the discretion of these agencies. To successfully deliver on the legislation’s promise, Congress, the Education Department, and the IRS should ensure that five key issues are addressed.

Implementation should:

• Be prompt and carefully designed to ensure unnecessary administrative hurdles no longer prevent borrowers from accessing affordable plans. Data sharing is complex, and it will be helpful for policymakers to identify and understand the specific steps the department and the IRS need to take to facilitate data security. It will also be important to ensure that borrowers no longer experience the consequences of an inefficient system, which are significant.

  Being severely delinquent or in default on a loan harms a borrower’s ability to access other forms of credit. Those who default can face garnishment of wages, Social Security, or other federal payments and withholding of federal income tax refunds. The Education Department and IRS will need to reach an interagency agreement to reduce the barriers that prevent borrowers from accessing affordable repayment plans.

• Put in place multiple opportunities to engage with struggling borrowers. To more easily access IDR plans, borrowers will need to agree to having their data shared. Questions remain as to how and when they will give this approval. For example, can borrowers provide approval only when applying for income-driven repayment, or also during other interactions across the loan life cycle, such as the new Annual Student Loan Acknowledgment or when leaving school during exit counseling? In addition, if a person gives approval for data sharing under one component of the system—such as completing the FAFSA—does that approval then apply for all other purposes?

  Research from The Pew Charitable Trusts indicates that a significant share of borrowers interact with the repayment system in more than one way, such as by requesting, being placed in, or retroactively using loan deferments or forbearances. Some, however, do not engage before falling behind on loan repayment or in periods of financial stress. This suggests opportunities for engaging with struggling borrowers, both before and after they leave school.

• Ensure that borrowers are clearly informed about payment changes. How and when borrowers who agree to data sharing are notified annually of their new payment is important. Forthcoming analysis from Pew, based on focus groups with borrowers across the country, highlights that participants’ broader financial realities informed how they repaid their loans. For example, those struggling the most with repayment indicated that they had limited resources and needed to cover their costs for transportation, housing, child care, and groceries before paying student loans.
• Ensure the repayment process remains manageable for those who do not give approval. These borrowers must still be allowed to access IDR plans by using the IRS Data Retrieval Tool—a mechanism borrowers can manually use to transfer tax information into their plan applications and FAFSA forms—or submit alternative documentation of their incomes. In addition, a clear process must be established to allow borrowers, such as those who lose their jobs, to manually recertify their incomes before the next year’s tax information is available.
  
  Although some borrowers can navigate the system and get what they need from their servicers and the repayment experience, many participants in Pew’s focus groups reported barriers to repayment, such as confusion driven by inconsistent information, especially around key friction points, such as the transition from school into repayment and enrollment in IDR plans. Efforts should be made to decrease barriers for all borrowers.
• Align with other efforts by the Education Department to improve the student loan servicing system. Those include the Next Generation Financial Services Environment, an initiative to modernize and streamline the technology and operational components of the repayment system. For example, there could be opportunities to request borrower consent in the department’s Aid Summary or Loan Simulator tools, centralized hubs for customer account information.