Income Driven Repayment: Who needs student loan payment relief?

In March 2020, the federal government paused payments on all $1.5 trillion of federal student loans then outstanding in order to provide financial relief to borrowers during the COVID-19 pandemic.¹ Federal student loans now total $1.6 trillion spread across 43 million borrowers. With the prospect of student loan forbearance ending and payments on this debt resuming, policymakers and student debt groups have put forward various proposals to further help struggling borrowers. These proposals have included efforts to reduce payment burdens for existing borrowers through outright forgiveness of debt² or changes to programs such as income driven repayment (IDR).³ Other reforms aim to make higher education more affordable and thus limit future borrowing⁴ The ultimate goal of these proposals is to alleviate the financial burden of student debt: monthly payments for some borrowers can constitute a large portion of take-home income and carrying such large debts can be an obstacle to greater financial health, (see, e.g., Farrell, Greig, and Sullivan 2020).

IDR is a collection of repayment relief plans available to certain borrowers to lower their monthly payment and potentially provide loan forgiveness. Under IDR, monthly payments are capped based on the borrower’s income, and if the borrower completes a certain number of IDR payments, any remaining loan balance is forgiven. While conceptually straightforward, the IDR programs have been criticized for a number of reasons, most of which argue that these programs do not provide sufficient relief to struggling borrowers.⁵  

Expanding relief through IDR could take many forms. It could be as simple as getting more currently eligible borrowers enrolled by reducing paperwork burdens, increasing awareness of the program, or even automatically enrolling all borrowers in IDR. Policymakers could also change the underlying parameters of IDR to lower monthly payments, decrease the amount of time borrowers spend in repayment, and increase the number of borrowers who are eligible for IDR.

However, there is a lack of information about borrowers who are currently eligible for IDR but not enrolled—their payment levels, their incomes, their wider financial situation—and this information is necessary to design relief programs and predict their effects. Specifically, how many are not enrolled because of obstacles to enrollment versus choosing not to enroll? How do their finances differ from other borrowers? Data on these borrowers is limited, especially data on borrowers’ current incomes, which is a primary criterion for IDR eligibility. Without this data it is impossible to know how many people might be eligible for current IDR programs or how many people might be eligible for expanded or revised IDR programs.

In this paper, we use administrative banking and credit bureau data to shed light on this group of borrowers. These data cover 117,000 borrowers and include measures of income, monthly scheduled payments, and actual payments made and thus provide a uniquely detailed window into the finances of student debt borrowers. Our finding are as follows:

1. A large portion of borrowers eligible for IDR are not enrolled, and these un-enrolled borrowers have significantly lower incomes than other borrowers.
2. Borrowers eligible for IDR but not enrolled appear to be keeping up with their student loan payments but use a large portion of their income to do so. Enrolling in IDR could decrease their short-term payment burden substantially.
3. Of borrowers eligible for IDR but not enrolled, most would receive debt forgiveness under IDR. But those with relatively higher incomes receive no forgiveness and IDR is equivalent to a loan extension, lowering their monthly payments but increasing the total cost  of their debt.
4. Changes to IDR may dramatically expand eligibility and reduce total out of pocket cost to current IDR enrollees.

These findings have several implications for the design of policies to relieve student debt. First and foremost, the IDR programs are complex and can have counterintuitive effects on borrowers’ finances. Lowering monthly payments extends the amount of time borrowers spend in repayment and carry the debt on their credit report, potentially increasing the amount of interest they pay as well as increasing the cost of other debt. For some borrowers this is a worthwhile tradeoff, and for others it is not.

In our data, we see many borrowers eligible for IDR but not enrolled who could see substantial monthly savings. This suggests that making IDR participation easier by, for example, reducing initial and recurring paperwork, could be highly beneficial. Nevertheless, the net benefits available for many other IDR-eligible borrowers are less obvious and avoiding IDR may be best for these borrowers’ finances.

Together, this implies that any move to automatically enroll borrowers in an IDR program should be accompanied by information about the tradeoffs of lower monthly payments and other aids to help borrowers.

Background

Income Driven Repayment (IDR) is a collection of programs offered by the Department of Education that allow borrowers to lower their monthly student debt payments when they have a high student debt–to–income ratio and potentially receive a forgiveness of debt after making a certain number of full and on-time monthly payments under the IDR program.

Each IDR program is a variation on a common template: Rather than paying along a standard 10-year amortization schedule, a new monthly payment is calculated based on the borrower’s income. Specifically, the new payment is calculated as a fraction of their discretionary income, usually 10 percent.⁶ Discretionary income here is the borrower’s adjusted gross income from their tax return minus the 150 percent of the federal poverty guideline.⁷

If the IDR amount is lower than their current payment, the borrower makes payments at this lower amount for one year. Each year, borrowers must recertify their eligibility and income, and their payment amount is re-calculated. This annual process continues until the borrower pays off their debt or makes the maximum number of payments required under IDR to receive forgiveness, ⁸ typically after 20 years for undergraduate debt.⁹ Once the borrower makes the required number of payments under IDR, the remaining balance on their loan is forgiven.

This means that IDR provides relief in two different ways: lower payments now and forgiveness in the future. But to receive forgiveness, the borrower must participate in IDR for 20 years, even if their monthly payment amount is $0. Furthermore, people on IDR may end up paying a considerable amount of money toward their debt, even if their monthly payments only just cover their monthly interest. Ultimately, whether IDR benefits any individual borrower depends on that borrower’s financial situation, their personal preferences for carrying debt, and their financial plans for the future.

Determining how borrowers not currently enrolled in IDR might or might not benefit from enrollment in IDR requires rich data on borrower balances and incomes, which the JPMC Institute is uniquely positioned to provide.