Whether you agree or disagree with President Biden’s executive order on student loan forgiveness of up to $20,000 per borrower, one thing is certain. With the creation of a new forgiveness program and repayment plan, managing federal student loans has gotten more complicated.
Millions of borrowers are already unaware of the availability of by-right federal programs to help them manage their debt. Without increasing the flow of critical information between the government, loan servicers and borrowers, little will change.
The Education Data Initiative estimates an average of 15% of student loans are in default. Millions of borrowers in default devastate their credit score and face wage garnishments and tax-refund withholding. Seniors in default can even have their Social Security checks garnished.
Yet, defaults are almost entirely avoidable. Instead of paying up to 25% of disposable earnings as the maximum garnishment permitted by the U.S. Department of Labor, that same borrower could enroll in an existing income-driven repayment plan in which his or her monthly bill could have been as low as 10% of discretionary income. In addition, borrowers who make less than 150% of the federal poverty level qualify for $0 per month payments.
The benefits of IDR plans extend beyond monthly cash flow. Borrowers facing wage garnishments will lose a portion of their paycheck until the debt is paid in full. Borrowers who make IDR payments for 20 or 25 years, depending on their repayment plan, have the remainder of their balance forgiven.
IDR can be a long road, but it provides a viable path for borrowers to get out from under their student debt. And it ultimately is fair in that it is calibrated to the borrower’s circumstance and financial condition.
So why have millions of college-educated borrowers defaulted when better options exist?
First, there isn’t enough effective communication between the U.S. Department of Education, loan servicers and borrowers. Students are defaulted into a 10-year straight amortizing repayment plan. Second, even though the federal repayment flexibility is a strength and a by-right option, the system is overly complex.
Inadequate communication and complexity make for a vicious cycle. As new programs are created to help make student debt more manageable, each program adds complexity to the system.
One recent study from the Pew Charitable Trust found that one in four federal student-loan borrowers were unaware of the existence of IDR plans. Adding a new IDR plan with a lower percentage or shorter forgiveness term will mean nothing if borrowers continue to struggle to understand these programs.
The unfortunate reality is that, today, even though the tax code is much more complicated than student loan regulations, it is much easier to file a tax return than it is to figure out a student loan repayment strategy. A key reason is that there are inexpensive, commercial applications (think Turbo Tax) available to translate often byzantine rules. Similar student loan applications and tools exist.
The Department of Education needs to cast a wide net to get information to borrowers desperately in need. It should advocate and facilitate awareness of the many tools available—public and non-public—to help borrowers navigate their student loan options. This is not a problem in search of a solution; it is a solution in search of awareness and empowerment, and the government should look to use all available resources. Now is the time for creativity.•
Lux is an attorney and founder of Indianapolis-based The Student Loan Sherpa, a website dedicated to student loan education, strategy and borrower advocacy.