By Jack Remondi
Americans navigating the student loan repayment process have many paths to choose from. In recent years, borrowers in the $1 trillion government education loan program have gained access to an expanding array of repayment options, including nine different plans that align payments with income level.
Income-driven repayment plans, as they are known, have been critically important to many new graduates, borrowers in transition, and those whose debt far exceeds their projected income over the long term. Today, nearly one in four borrowers in the government’s Direct Loan program makes payments based on their income.
While these plans are a life raft for many, the staggering number of options — 56 in total — complex terms and cumbersome application and renewal processes leave many others adrift. Take the nine income-driven repayment options. Some count a spouse’s income in the formula, some don’t. Some last for 20 years, and some for 25. Some cap payments, while others allow the payment to grow uncapped as income increases. Many offer loan forgiveness after a set period of payments, but with the likelihood of a significant tax liability — unless the forgiveness was based on public service, yet another option.
While program specifics differ, all are likely to cost the average borrower more over time because interest accrues over a longer period. Worst of all, these plans often result in extended periods of “negative amortization,” in which monthly interest exceeds the monthly payment, causing a borrower’s total balance to increase even when they are paying on time.
Compounding the confusion, the programs have sound-alike names, such as Income-Based Repayment, Income-Sensitive Repayment, Income-Contingent Repayment, Pay As You Earn and Revised Pay As You Earn. This level of complexity is enough to baffle even savvy budgeters, let alone graduates transitioning from school to work, whose first experience with borrowing of any kind is often student loans.
It doesn’t need to be so complex. Student loan servicers make and field millions of calls each year to help borrowers navigate these options. In our thousands of daily interactions with borrowers, we see firsthand what helps and what obstructs or delays access to these reduced payment plans. While we work as hard as we can to match our customers with the best options for them, there are a number of policy changes that would simplify these programs and lessen the burden on borrowers—enabling them to easily and confidently weigh their options and chart a course for successful repayment.
First, the variety of available payment plans should be reduced to the fewest, most borrower-friendly options, giving consumers the ability to tie payments to income, step up their payments over time, or accelerate their payments. In remarks made at a recent industry conference, one expert suggested that the right number of payment plans is three to four.
Further, it should be easier to enroll in plans tied to income. Even when borrowers actively explore their options and pick an income-driven plan, the multi-step enrollment process and 12-page application can be a significant deterrent.
These challenges may be why, in an analysis of Navient-serviced borrowers, just 28 percent of the past-due, pre-qualified borrowers we spoke with completed all of the necessary steps to enroll in an income-driven repayment plan, even when we sent multiple reminders. To put a fine point on it: 72 percent had not submitted an application even after knowing how much lower their monthly payment would be under the new plan.
Why so few? The current process requires borrowers to go to a Department of Education website to complete a lengthy application — a process the servicer is not allowed to facilitate — and select a program from among similar-sounding options. Alternatively, they can submit the 12-page paper application. They must also provide proof of income, such as a filed tax return, or authorize the IRS to transfer information.
In the modern economy, technology enables millennials to hail a car, order groceries, or access volumes of information conveniently and instantly. The process of signing up for IDR should be just as simple.
Borrowers should be able to enroll while they’re logged in to their account, as opposed to visiting a separate website. Those who need help over the phone — and we find that most do — should be able to enroll while they’re on the line with their servicer. The process of validating income should be simpler and more flexible, leveraging mobile technology and providing simple, verbal options for those without easy access to online solutions.
Once borrowers are enrolled, additional hurdles remain, such as the federal requirement to reapply annually. We find that too many borrowers do not renew on time or at all, despite many reminders to do so. Certainly, some actively choose not to re-enroll because their economic circumstances have improved– that’s good news. Others, however, would find their loans easier to manage if they could sign up to automatically renew enrollment each year without having to file a new application, an option not available today. For those who opt for an annual application process, making the deadline memorable, such as birthday month, would be another way to increase timely renewals.
As noted in a recent White House report, “behavioral economics shows that onerous processes can impact choices, especially when the individuals making decisions are young.” As the largest student loan servicer, we see this play out again and again, day after day. The complexity of the federal loan repayment program — as it has evolved over time — hurts those borrowers who need the most help. That is why we promote and support a streamlined system that removes these barriers and helps more Americans achieve repayment success.
It’s not a lack of options that leads to federal student loan default. Simplifying the number and complexity of repayment programs will increase borrower engagement and reduce defaults, an outcome we can all support.
Jack Remondi is president and CEO of Navient, based in Wilmington, Del. The company services student loans for more than 12 million customers.