- Income-based repayment plans were created in 2007 to provide borrowers with affordable monthly bills.
- But an employee at a student loan company who saw the program’s development said it was bad from the start.
- She described a difficult paperwork process and a growing interest that accompanies the plans.
The purpose of income-based student loan repayment plans is in the name: offer borrowers affordable monthly payments based on the income they bring home with a promise of loan forgiveness after about 20 years.
But an employee at a small Iowa student loan company who was there when the Department of Education introduced the earnings-based repayment program in 2007 told Insider that it was flawed from the start.
“Executing that plan was never the problem,” said the worker, who asked not to be known but whose identity is known to insiders. “It was a bad program from the start.”
The plans allow borrowers with privately held direct federal loans or loans through the Federal Family Education Loan program to repay them through monthly payments set at a percentage of their discretionary income, with repayment forgiveness after 20 or 25 years .
While the first income-based repayment plan — known as the earnings-related repayment plan — was introduced in 1994, when President Joe Biden took office last year, only 32 borrowers overall had received forgiveness, and interest on the loans has added a significant burden. Investigations have described major flaws in the plans, such as a failure to track payments. And while the Biden administration has announced reforms to the program, Arbeiter said failure of the plans isn’t getting enough attention.
The worker has been with an Iowa nonprofit student loan company that services private and FFEL loans for over a decade. She said that President George W. Bush’s Department of Education gave companies poor guidance on how to implement the plans, resulting in a difficult application process that has coincided with rising interest rates on the loans.
“We didn’t even want to tell people about the loan forgiveness because we didn’t want people to bet on it,” the worker said. “Because we knew how unlikely it would be for her to get it. People are going to get a lot of interest and it’s going to be really bad for them and we really didn’t want to offer it to them.”
“We have so many people who have such great problems applying”
An NPR investigation into income-based repayment plans released in April found that internal documents from a 2016 review indicated that three student loan companies — Mohela, CornerStone and the Pennsylvania Higher Education Assistance Agency — paid borrowers for the plans, i.e. the borrowers those not prosecuted had to ask the companies to “perform a laborious desk review” to determine if they qualified for a forgiveness.
The student loan company employee described a confusing paperwork process with these plans.
“It was just always complicated, how overly so,” she said, referring to enrolling in the plans. “Believe it or not, as much trouble people are having today, it was a lot worse back then. But we still have so many people who have such great problems applying.”
Borrowers who wish to enroll in an income-based repayment plan are required to provide proof of income, which the worker says can be difficult, especially for self-employed borrowers. The worker said if she could not verify the borrower’s gross income and payment frequency, the borrower could be denied enrollment in a plan.
She added that while the application process has been simplified somewhat and reduced to a form that borrowers must fill out each year, it still leaves room for error as the form and supporting documents require significant accuracy.
“It’s not that hard if you see it every day – if you really get your head around it, it’s pretty easy – but this is a shape that people see once a year, so we don’t expect them to remember it.” , and it really is that easy to get stuck,” she said.
Borrowers with income-contingent repayment plans can expect interest rates to rise
Student loan borrowers are probably aware of the impact of interest on their debt — it has prevented many from charging the original balance they borrowed.
A 59-year-old man who originally borrowed about $79,000 told Insider last year that he repaid $175,000 and still owes $236,485. He described it as a “debtors prison” and said the accumulated interest kept him in an endless cycle of repayments.
Income plans also include interest. The worker said putting people on a 25-year payback schedule didn’t stop interest from growing. She said if a borrower is late in recertifying their income, the interest will be capitalized – meaning it will be added to the original loan balance so future interest will increase based on that higher amount – resulting in higher monthly payments.
Biden’s Department of Education recently indicated that it wants to avoid capitalizing on interest whenever possible. While this could help borrowers into 2023, those who have been in repayment for decades could continue to struggle with higher monthly payments.
Lawmakers and proponents are urging Biden to keep pushing reforms
In December, Biden announced reforms to income-based repayment plans that would allow borrowers to self-report their income — instead of filing tax papers — to apply for or recertify the plans by July 31. In April, the department proposed corrections to the plans and said it would conduct a one-off review of past payments.
However, an Education Department spokesman told Insider on Thursday that an improved repayment plan would not be included in the upcoming regulation proposal, and after NPR released its findings, lawmakers on both sides of the aisle called on the Education Department to take the reforms a step further walk .
Sen. Patty Murray and Rep. Bobby Scott, the chairs of the Senate and House Education Committees, wrote a letter in April urging Secretary of Education Miguel Cardona to establish a new income-based repayment plan that “keeps payments affordable, prevents debt mandates bloating over time and provides a reliable route out of perpetual payback.”
Also in April, 117 advocacy groups called on Cardona to create an income-based repayment plan waiver that would, among other things, retrospectively allow any payment made by a borrower to count toward loan forgiveness.
A spokesman for the Department of Education told NPR at the time that the department was “aware of historical issues with previous processes that would have undermined the accurate tracking of eligible payments,” adding, “The current situation is unacceptable and we are committed to addressing these issues.” .”
The employee at the student loan company said she hoped that was the case.
“I think the government has a responsibility to these people because we did that to Gen Xers and Millennials, but now we’re getting a lot of Gen Z there,” she said. “And these are all these people who are trapped in this debt because they were told that they would make the wise and tax-responsible decision to go on the income-based repayment plan and get a payment that matched their income. And everything it has done only leads to massive debt.”