- Income-based repayment plans were created in 2007 to give borrowers affordable monthly bills.
- But a student loan company employee who witnessed the program’s inception said it was wrong from the start.
- She described a difficult administrative process and growing interest that accompanies the plans.
The purpose of income-based repayment plans for student loans is in the name: to give borrowers affordable monthly payments based on the income they take home, with the promise of loan forgiveness after about 20 year.
But an employee of a small student loan company in Iowa who was there when the Department of Education created the income-contingent repayment program in 2007 told Insider it was flawed to begin with.
“Implementing this plan was never the issue,” said the worker, who asked to remain anonymous but whose identity is known to Insider. “It was a bad program from the start.”
The plans allow borrowers with direct federal loans or loans through the federal Family Education Loans program, which are private, to repay them in monthly installments set at a percentage of their discretionary income, with forgiveness after 20 or 25 years of reimbursement.
While the first income-based repayment plan – known as the income-contingent repayment plan – was introduced in 1994, when President Joe Biden took office last year, only 32 borrowers in total received a discount, and the interest on the loans added a significant burden. Investigations described major flaws in the plans, such as a failure to track payments. And while the Biden administration has announced reforms to the program, the worker said the plans’ failures aren’t getting enough attention.
The worker has worked for more than a decade at an Iowa nonprofit student loan company that handles private and FFEL loans. She said President George W. Bush’s Education Department misadvised the companies on implementing the plans, leading to a difficult application process that came with increased interest on the loans.
“We didn’t even want to tell people about loan forgiveness because we didn’t want people to bet on it,” the worker said. “Because we knew how unlikely they were to get it. People are going to rack up a lot of interest, and it’s going to be really bad for them, and we really didn’t want to give it to them.”
“We have so many people who find it so difficult to apply”
An NPR investigation into income-driven 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 — were not tracking. not payments from borrowers toward the plans, meaning borrowers had to ask companies “to conduct a labor-intensive file review” to determine if they were eligible for forgiveness.
The student loan company worker described a confusing paperwork process with these plans.
“It was just always complicated, like too much,” she said, referring to signing up for plans. “Believe it or not, even though people are having a hard time applying, it was a lot worse back then. But we still have so many people who are having such a hard time applying.”
Borrowers who want to enroll in an income-based repayment plan must provide proof of income, which the worker says can be difficult, especially for borrowers who are self-employed. The worker said that if she cannot verify the borrower’s gross income and payment frequency, the borrower may be denied membership in a plan.
She added that although the application process has become a bit simplified and condensed into one form that borrowers have to fill out every year, it still leaves room for error as the form and supporting documents require significant precision.
“It’s not that hard if you see it every day – if you really know it, it’s quite simple – but it’s a form that people see once a year, so we don’t expect what they remember, and it’s really easy to stick with it,” she said.
Borrowers on income-based repayment plans may face escalating interest
Student loan borrowers are probably well aware of the impact of interest on their debt – it prevents many from reducing the original balance they borrowed.
A 59-year-old man who originally borrowed about $79,000 told Insider last year he repaid $175,000 and still owed $236,485. He described it as a “debtor’s prison”, saying the accrued interest had kept him in an endless cycle of repayments.
Income-oriented plans also involve interest. The worker said putting people on a 25-year repayment plan doesn’t stop interest from growing. She said if a borrower delays recertifying their earnings, the interest will be capitalized – meaning it is added to the original loan balance, so future interest increases by that higher amount – resulting in payments higher monthly.
Biden’s education department recently indicated that it wants to prevent interest capitalization whenever possible. While this may help borrowers starting in 2023, those who have been repaying for decades could continue to face higher monthly payments.
Lawmakers and lawyers push Biden to go further on reforms
In December, Biden announced reforms to income-oriented repayment plans, including allowing borrowers to self-report their income — rather than submitting tax documents — to apply for or recertify the plans through July 31. In April, the department proposed fixes to the plans. and said it would conduct a timely review of past payments.
However, a Department of Education spokesperson told Insider on Thursday that an enhanced reimbursement plan would not be included in the upcoming regulatory proposal, and after NPR released its findings, lawmakers on both sides of the aisle urged the Ministry of Education to take the reforms a step further. .
Senator Patty Murray and Rep. Bobby Scott, the chairmen of the Senate and House Education Committees, wrote a letter in April urging Education Secretary Miguel Cardona to establish a new repayment plan based on income “that keeps payments affordable, prevents debts from building up over time, and provides a reliable path to perpetual repayment.”
Also in April, 117 advocacy groups urged Cardona to create a waiver for income-driven repayment plans that would retroactively allow any payment made by a borrower to count toward loan forgiveness, among other proposals.
A spokesperson for the Education Department told NPR at the time that the department was “aware of historical issues with past processes that had compromised the accurate tracking of eligible payments,” adding, “The current situation is unacceptable. and we are committed to resolving these issues.”
The student loan company employee said she hoped that would be the case.
“I think the government has a responsibility to these people, because we did it for Gen X and Millennials, but now we’re getting a lot of Gen Z in there,” she said. “And it’s all those people who get trapped in that debt because they’ve been told they’re making the smart, financially responsible decision to go into the income-based repayment plan and have a payment to match. to their income. And all done only leads to massive debt.”