Income-driven repayment plans don’t forgive student loans

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A new National Consumer Law Center (NCLC) Report found that while 8 million Americans are currently enrolled in income-tested student loan repayment plans, only 32 borrowers have received the remission promised by the program.

The income-based repayment program, implemented over 25 years ago, aimed to ease borrowers’ student loans by basing monthly payments on current income and family size, and then forgetting any remaining debt. after 20 to 25 years of payments. The NCLC report, however, highlights how difficult it is to access the benefits of the program.

2 million borrowers should have received a loan forgiveness

The federal income-based repayment program has been around in one form or another since 1995, designed to completely free borrowers after 20 to 25 years. However, the program is optional and it appears that many borrowers were unaware of the program when it was created or were otherwise hijacked. According to the report, 2 million federal student loan borrowers have been in repayment for 20 years and still have undergraduate student loan debt – 2 million borrowers who, if they were enrolled in IDR plans, should have had their debt written off by now. Instead, only 32 borrowers received a student loan discount under the program.

According to the report, borrowers who signed up for the Income-Based Repayment Plan (ICR Plan) in 1995 should have been canceled starting in 2020, while borrowers who signed up for the ICR and switched to the plan. REPAYED when it became available should have been canceled starting in 2016. “In other words,” the report states, “most borrowers who entered ICR in 2000 or earlier should have received a full cancellation of their loan. ready now.

Imperfect paths to access IDR plans are to blame

The income-driven repayment promise is that after 20-25 years of on-time and full payments, the borrower will receive full forgiveness of the remaining student loan debt. Since these monthly payments are based on your monthly income and your family size, the payments are lower than they would be under a standard repayment plan.

However, the report claims that the main problem is not with the program itself, but with the accessibility of the program. The report cites “flawed program design, failed implementation by the student loan industry and continued mismanagement by [the U.S. Department of Education]As the main reasons for the failure of the program.

Some of the blame could fall on student loan managers, who are responsible for directing borrowers to different repayment plans. Service agents may not have adequately advised borrowers on starting up or changing plans, leaving many to pay more or longer than they should. Some services, like Navient, have also been the subject of legal action alleging misinformation that has diverted borrowers from IDR plans.

The failure of service agents to properly implement IDR plans has a particular impact on black and Latinx borrowers, who already bear a disproportionate burden due to student loans. “A recent analysis of the Federal Reserve’s survey of consumer finances offers new evidence that borrowers of color struggle to benefit from IDR, even if they access this protection at higher rates than their white peers, ”the report says. “Even with the IDR, black borrowers continue to default at extraordinarily high rates – a potential result of disparities in recertification.”

Some reforms could be underway

NCLC stresses that failure of IDR plans to cancel student loans is indicative of major flaws within the program, but the program is a symptom of a larger problem with student loan cancellation federal. “It shows why outright debt forgiveness – unrelated to IDR – must be part of the Biden administration’s student loan plan, and why the existing IDR program is not a substitute.” In the meantime, the report suggests an audit of the current program.

Reforms within the IDR program could have major financial impacts. The latest stimulus package passed by Congress includes a provision that makes any student loan forgiveness federal tax-free until 2025. Prior to the adoption of this stimulus package, any debt forgiveness through repayment based on income was considered taxable income, leaving borrowers potentially thousands of dollars owed at the end of the repayment period even though their debt was canceled.

If President Biden continues to cancel the student loan, or if the reforms to the IDR system include retroactive discount for borrowers who have been misled, borrowers could save thousands of dollars under the new provision. Additionally, Biden also offered to implement a new IDR plan that would cancel loans after 20 years, to which all undergraduate loan borrowers would automatically be enrolled. This automatic enrollment could help more borrowers see forgiveness as promised.

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