Student-debt solution falls short
Income-driven plans caused confusion instead of curbing defaults.
With more than 7.5 million student loan borrowers in default and nearly 2 million others seriously behind on their payments, there’s little question that the handful of federal programs designed to help struggling borrowers pay what they can afford aren’t working for everyone.
The idea is simple: Borrowers make payments based on how much money they earn. But these so-called income-driven repayment plans are mind-numbingly complicated. There are four different versions to sort through, all with slightly different rules. They can be tricky to get into and easy to fall out of, yet they’re becoming increasingly essential.
Enrollment in income-driven plans has grown to 8 million, a more than fourfold increase from 2013, making it a crucial coping mechanism for a broad population of borrowers. But many of them carry higher balances, suggesting they pursued advanced degrees — an indication that the most at-risk borrowers, who often carry less debt, are not finding their way in.
“There was a narrative that this was going to, if not solve, significantly reduce, the problem around defaults on student loans,” said Mark Huelsman,
associate director of policy and research at Demos, a public policy organization. “But we haven’t seen that happen.”
Haley Garberg, a newly married 33-year-old physical education teacher, has been in various repayment plans for nearly a decade. Her first job after graduating in 2008 paid $22,000 annually — a salary that didn’t come close to covering her living expenses and a $700 monthly loan payment. With her parents’ help, she made those payments for a couple of years. But she eventually called her loan servicer and managed to get into a plan that saved her nearly $200 a month — enough wiggle room to afford internet service.
Still, Garberg was living close to the edge. She moved back with her parents in 2013 to build up her savings as she also dealt with a rare breathing condition that required three surgeries over the following year. A $3,000 insurance deductible meant she had to take out a personal loan to pay her share of the bills, and when she couldn’t afford her inhalers, at roughly $300 to $400 a month, she would do without them. She switched plans again in 2014, and pursued a master’s degree in hopes of boosting her earning power.
“Income-driven repayment doesn’t care that you have 18 bills to pay,” she said.
First instituted 25 years ago, income-dependent repayment was expanded during the administrations of George W. Bush and Barack Obama. It also grew more complicated. Borrowers must sort through an alphabet soup of income-driven repayment plans: ICR, IBR (which comes in two flavors, new and classic), PAYE and REPAYE.
Monthly payments are often calculated as 10 percent to 15 percent of discretionary income, but one plan costs 20 percent. Discretionary income is defined as the amount earned above 150 percent of the poverty level, which is adjusted for household size. For a single person, the federal poverty level is typically $12,490, so single borrowers generally pay 10 percent of what they earn above $18,735. (After 20 years — sometimes 25 — any remaining debt is forgiven. So far, about 20 borrowers have remained enrolled long enough for that to happen, according to the Education Department.)
But the payment calculation is the same for all borrowers, and doesn’t account for local variations in cost of living. And, as Garberg discovered, it also doesn’t consider borrowers’ other costs.
“The assumption that nobody should be defaulting because we have IDR is making the false conclusion that IDR is affordable,” said Colleen Campbell, director for postsecondary education at the Center for American Progress, a left-leaning research and policy group. Some borrowers with low incomes and low balances often don’t receive any relief because of a quirk in the formula, she said.
Once borrowers are in a program, it can be necessary they stay there: Interest still accrues on many of the loans, meaning those who make zero or low payments for many years can fall deeper in debt. To exit the program could mean jumping up to a higher payment than they had faced before enrolling.
And experts believe the programs are not reaching the most vulnerable borrowers who could benefit the most.
Those in default don’t look like your stereotypical college student, according to a report by the Center for American Progress. Defaulters tended to be older, nearly half never finished college and their median cumulative student debt held was rather low, at $9,625.