Each year millions of young people take out education loans to help them pay for college. And each year, about one million individuals default on their federal student loans, despite the availability of flexible repayment plans that could help them stay current on their loans.
The stakes are high for students taking out loans—especially those who may face financial stress when they graduate—because student debt is not dischargable in bankruptcy, and defaulters face damage to their credit records, higher interest rates, and even denial of employment.
A new, bipartisan bill introduced in Congress today by Representatives Suzanne Bonamici and Ryan Costello aims at helping more borrowers stay out of loan default when they graduate by providing them more assistance in accessing flexible repayment plans.
Under the SIMPLE Act borrowers who become over ninety days delinquent will receive a written notice from the Department of Education informing them of (1) flexible repayment plans they are eligible for, such as Income Based Repayment (IBR) and (2) the specific amount in which their monthly payments could be reduced under each option.
If the delinquent borrower does not affirmatively select a repayment plan offered by the Secretary after receiving the notice, under the SIMPLE Act, the Secretary shall automatically select the repayment plan for the borrower that offers the lowest monthly payment plan if the loan remains delinquent after 120 days. Borrowers can opt out if they chose.
Repayment plans like IBR allow student borrowers to adjust their loan payment to better reflect their current earnings. The goal of plans like IBR is to help borrowers better manage their debt, and help reduce loan defaults. Currently, borrowers who do not affirmatively select a plan like IBR are put in the standard ten-year repayment plan, which has the highest monthly payment amounts.
In order for the Secretary to determine if the borrower is eligible for a flexible repayment plan, the SIMPLE Act also expressly gives the Secretary the authority to access information on tax returns to verify the borrower’s income. Currently, borrowers must specifically request the IRS transfer their tax and income information to the Department of Education.
Borrowers currently also must affirmatively reapply each year, or lose eligibility of lower payments. A large number of borrowers fail to complete the paperwork requirement necessary to recertify on time. The SIMPLE Act also allows the Secretary of Education to automatically recertify eligibility for IBR-type repayment programs each year, further streamlining the repayment process.
The bill may face criticism from student advocates that the express authority to allow the Secretary to move delinquent borrowers into more flexible repayment options only applies to future, first-time borrowers, and not to the 40 million current student loan holders, who have over $1.2 trillion in total outstanding debt.
A recent Century Foundation report, “Student Loan Borrower Relief: Hiding In Plain Sight,” noted that individuals who move from the standard ten-year repayment plans to more alternative, flexible plans like Income Based Repayment are significantly less likely to default on their loans.
But many borrowers are unaware of the Department of Education’s alternative repayment plans, and the Bureau of Consumer Financial Protection concluded that borrowers often fail to sign up due to “inconsistent and incomplete” information provided by loan services. In order to significantly reduce loan defaults, the Century Foundation report called for the Secretary to automatically move all delinquent borrowers into more flexible repayment plans, such as IBR.
Despite the low profile of alternative repayment plans, there is progress in helping additional borrowers transition into better repayment options. The Department of Education recently reported that 5.3 million borrowers in the department’s Direct Loan program were enrolled in flexible repayment plans, a 36 percent increase from June 2015 and a 110 percent increase from June 2014. The department also reported modest reductions in student loan delinquencies and defaults.