Why Have So Few Student-Loan Borrowers Taken Advantage of Income-Based Repayment?

A new plan to raise awareness about the Income-Based Repayment program is the latest step in the Obama Administration's efforts to lessen the burden of student debt

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President Barack Obama greets Joplin High School graduates just before the commencement ceremony at Missouri Southern State University in Joplin on May 21, 2012

Last week, the Obama Administration outlined a plan to make more borrowers aware of the Income-Based Repayment (IBR) program and make it easier for those who qualify to apply. The plan is the latest step in the Administration’s efforts to lessen the burden of student debt and is specifically designed to encourage more borrowers to sign on to a program that, despite being a great option for distressed borrowers, has been underutilized.

Since 2009, federal student-loan borrowers who are experiencing a “partial financial hardship” and are thus unable to make payments under their standard repayment plan have been able to enroll in IBR to cap their monthly student-loan payments at 15% of their discretionary income. (In 2010, President Obama signed legislation that lowered the cap to 10% for borrowers beginning in 2014.)

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The calculation is complicated, but basically, lenders will look at how much a borrower makes, note how far above the poverty line it is and adjust the payments accordingly. If the result is below the standard repayment plan, then borrowers are given the option to pay less. If they stick with the plan for 25 years, any remaining debt (both principal and interest) is automatically forgiven. For those who work full-time at a nonprofit or public-service job, the remaining debt is forgiven after only 10 years.

In other words, IBR is a much more reasonable option for many borrowers who are struggling to make monthly loan payments. Yet even though the Federal Reserve Bank of New York estimates that more than 5 million student-loan borrowers currently have at least one loan that is past due, as of February, only 630,000 people were enrolled in IBR. “Too few borrowers are aware of the options available to them to help manage their student-loan debt, including reducing their monthly payments through IBR,” President Obama wrote in a White House memo sent to the Secretaries of the Departments of Education and the Treasury and released to reporters last week. “Additionally, too many borrowers have had difficulties navigating and completing the IBR application process once they have started it.”

In an effort to correct these issues, the Administration plans to streamline the application process to allow borrowers to automatically import their IRS tax-return income data directly into the IBR application, so they can complete it in one sitting without having to contact their lender. The plan also seeks to increase the online and mobile resources for borrowers to learn about their options. The Administration will also attempt to increase awareness of IBR, which may prove the hardest goal to accomplish.

That’s because IBR suffers from an image problem. “Students already in repayment may not be as aware of it as an option or may believe themselves to be ineligible,” says Mark Kantrowitz of financial-aid information sites FinAid and Fastweb. “The U.S. Department of Education has not done much promotion of the option, nor have the colleges.” But some of the lack of awareness may also be the fault of the lenders, who are sometimes reluctant to even mention the program as an option to distressed borrowers because if one enrolls, the lender gets less money per month in payments.

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“We’ve heard from borrowers who were told by lenders that IBR was not for them when it was, or who said IBR wasn’t even mentioned as an option,” says Lauren Asher, president of the Institute for College Access and Success, a nonprofit organization. “Borrowers need to be able to make an informed decision, rather than having it made for them.”

Asher says while the Obama Administration’s plan to raise awareness is a step in the right direction, more needs to be done. That’s because their plan only mandates that lenders inform borrowers of their options, including IBR, when the students graduate and again when they enter repayment. The plan makes no mention of having to inform borrowers of IBR when their payments are delinquent. A borrower can miss payments for nine months before a loan enters default, so reaching borrowers during this critical time of delinquency is key. “More needs to be done to reach out to borrowers — not just when they first start to repay their loans,” Asher says. “It’s important [that] people get notice when they need it most.”

Have questions about Income-Based Repayment? IBRinfo is your best source of information.

Webley is a staff writer at TIME. Find her on Twitter at @kaylawebley, on Facebook or on Google+. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.

5 comments
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Mr.Excedrin

I use the IBR method for my student loans and it works just fine. Grant it, I will have to wait 24 more years before my loans are gone completely but hopefully I will get a higher paying job that will allow me to pay off the loans faster. This def helps a lot when you are working minimum wage and you are making $500 every two weeks and you have rent, gas, food, etc to pay. Not having a $350 a month student loan payment does help. So I thank the Obama Administration for that. 

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Turk
Turk

Many people actually DO know about IBR.  However, with those of us that have LARGE student loan debts (>100k, and some currently around 200k) IBR is just depressing.  If you graduate and go through the application process for IBR, and qualify, your payments will probably not equal out the interest that accumulates each year.  Due to this, you'll be paying interest (the next year) on the interest that was unpaid the year before; so your overall indebtedness INCREASES each year!  This will be the case until anyone with a large debt on IBR gets a fantastic job that pays an amount such that they can make the REGULAR payments (no longer IBR).  Also, being on IBR for 25 years and not completely paying off the loans means that the individual has had a fairly LOW paying job for 25 YEARS, taking them at least into their late 40's, if not 50's before their student loans are gone.  While IBR is NOT as widely known, or understood, as it should be, the lack of knowledge about the program is NOT the only issue preventing people from utilizing it as an option.