Income-Driven Repayment (IDR) is intended to be the safety valve for borrowers who can’t afford to make their student loan payments. Anyone can sign up, make payments that are pegged to their earnings, and then after 20 or 25 years — depending on which plan they are in — they are eligible to receive forgiveness for any remaining debt (meaning their debt is erased).
Those in public service careers, meanwhile, are eligible for forgiveness after 10 years. And those monthly payments can be as low as $0 and still count towards forgiveness. In fact, nearly half of borrowers enrolled in IDR have $0 payments. You can learn more about how to sign up for IDR here.
Unfortunately, there are also lots of problems with income-driven repayment and public service loan forgiveness, both in terms of how they have been designed and how they have been carried out. So many problems, in fact, that very few borrowers have yet benefited from forgiveness under IDR. Some loan servicers — the companies the government hires to collect payments and help borrowers — haven’t even tracked how far along borrowers are towards forgiveness. Similarly, the government has had to make temporary fixes to ensure that public servants who have made 10 years of payments can actually receive the forgiveness they qualify for.
Frustrations with Income-Driven Repayment
Some critics of IDR assert that even as they are intended to work, plans that exist now are not generous enough to help borrowers who are struggling financially, that payments for borrowers’ income should be lowered, and that forgiveness should be granted sooner. On the other hand, others say that people who have large amounts of debt because they earned graduate degrees are benefiting too much from the system — letting taxpayers pitch in on debt that they could afford to pay themselves.
Additionally, IDR is a very complicated system. Borrowers essentially have to reapply every year. The most vulnerable borrowers, people who are struggling to make ends meet and may not even have a stable address, can easily fall through the cracks. There is a law passed in 2019 that will ease some of this paperwork, but concerns remain.
Additionally, sometimes IDR payments are so low that they don’t cover the interest on the loan, which means the borrower is watching their balance grow rather than shrink.
Loan servicers have also been faulted for failing to adequately explain or administer IDR. But loan servicers say the system is too complicated and that borrowers are often confused or do not follow through on the government’s paperwork requirements.
Ultimately, because of these systematic issues, many people end up defaulting on their loans when they could have benefited from IDR and avoided penalties like ruined credit or having some of their wages seized by the government.
Should Income-Driven Repayment Be Automatic?
To address some of these flaws, a number of experts and policymakers support making IDR the default setting for student loan repayment, or even the only repayment option. Some also want to make repayment work more like taxes, where employers automatically withhold loan payments from borrowers’ paychecks. These proposed alternatives would remove significant hurdles for borrowers because they would no longer need to know about the program in order to benefit from it or complete paperwork to enroll or re-enroll.
Critics of such a reform warn, however, that IDR might encourage borrowers to make the lowest possible monthly payment, thereby stretching out their repayment time and paying more in total than they would have paid on a standard plan, because there will be more interest to pay. Another concern is that these reforms may be difficult to make a reality, in both gaining consensus among lawmakers and actual execution.
An Alternative Approach
Others have proposed changing the fundamental nature of a student loan. Under this idea, borrowers would repay their debt as something called an “income-share agreement.” The student would receive a certain amount of money to help pay for college, but rather than repaying that exact amount plus interest, a borrower would pay a fixed share of their income for a set amount of time. Say, 5 percent over 25 years. They would no longer have a balance or be charged an interest rate.
While that may sound similar to paying off the student loan through an IDR plan, the key difference is that borrowers who go on to earn high incomes will pay more than if they were repaying a loan. If the government took this approach, the advantage from a public policy perspective is that it could be cost-effective for the government, which in turn could allow policymakers to reduce payments for borrowers with low incomes. Put another way, high-income borrowers would pay more so that low income borrowers could pay less.
It’s worth noting that a number of concerns have arisen about the fairness of income-share agreement already offered by private companies, but an ISA run by the federal government could potentially address those concerns.
Dive deeper into income-driven repayments using the below resources:
- Fixing Income-Driven Repayment for Federal Student Loans (American Enterprise Institute)
- How Congress Can Fix Student Loan Repayment (Center for American Progress)
- Income-Driven Repayment Isn’t Enough to Prevent Default (Center for American Progress)
- How to Make Student Debt Affordable and Equitable (Manhattan Institute)