Reforming Income-Driven Repayment: A Path to Bipartisan Student Loan Relief

In August 2023, the Department of Education rolled out a new income-driven repayment (IDR) plan. This program, the Saving on a Valuable Education (SAVE) Plan, aims to tackle major issues within the IDR system and provide student loan borrowers with a more generous repayment option. Yet the SAVE Plan is expensive and poorly targeted, underscoring the need for bipartisan, durable solutions to help struggling borrowers and comprehensively reform a broken IDR system.

Serving as an alternative to standard student loan repayment options, IDR plans provide relief to heavily indebted borrowers by guaranteeing manageable payments. These plans tie loan payments to the borrower’s income—10% of discretionary income, in the case of the most used existing plan, the Revised Pay-As-You-Earn (REPAYE) Plan—and provide forgiveness of remaining balances after 20 or 25 years of repayment.

The IDR system has long been excessively complex for borrowers to navigate. Prior to the enactment of the SAVE Plan, there were four different IDR plans with varying terms, making it difficult for borrowers to determine which plan was best for them. Borrowers had to opt into an IDR plan and recertify their participation annually, which could discourage take-up—especially for the most vulnerable. Borrowers on an IDR plan could also see their loan balance increase over time if their monthly payments did not cover accrued interest since unpaid interest was capitalized and added to their principal balance. In addition, IDR plans have been plagued with servicing errors. On August 14, the Department of Education discharged nearly $40 billion in student loan debt for 800,000 borrowers on IDR plans who had made 20 or 25 years’ worth of loan payments but had not received the forgiveness to which they were entitled.

Both the Biden administration and legislators have proposed changes to address these longstanding issues within the IDR system.

The administration’s SAVE Plan replaced the REPAYE Plan, raising the income threshold under which borrowers are not required to make payment from 150% to 225% of the federal poverty line, reducing monthly payments from 10% of discretionary income to 5%, offering forgiveness for eligible borrowers with low initial balances after just 10 years, providing for automatic enrollment of borrowers who are delinquent in their payments, and eliminating interest capitalization.

Although BPC commends the goal of simplifying and streamlining the IDR system, this plan is costly and regressive. By reducing payments for borrowers regardless of their ability to pay, a significant portion of the plan’s benefits are likely to go to higher-income households. Some argue that the SAVE Plan is an indirect approach to student loan forgiveness, following the Supreme Court’s rejection debt cancellation.

Because IDR reform has significant federal budget implications, it should be determined by Congress. Recent legislative proposals provide three different paths:

• The SAVE for Students Act (S. 1971), sponsored by Sens. John Cornyn (R-TX) and Bill Cassidy (R-LA), would streamline repayment options for borrowers by creating a single IDR plan based on the REPAYE Plan. Borrowers who are delinquent on their payments would be automatically enrolled and the plan would offer expedited forgiveness for undergraduate borrowers with a low initial loan balance.
• The LOAN Act (H.R. 1731), sponsored by Rep. Frederica Wilson (D-FL) and several House Democrats, would generally not modify the terms of IDR plans but would provide automatic enrollment for delinquent borrowers into the most affordable plan for them. This proposal further eliminates interest capitalization for student loans, including those in an IDR plan.
• The FAIR Act (H.R. 4144), sponsored by Rep. Burgess Owens (R-UT) and several House Republicans, would simplify the repayment system by creating a single IDR plan. This plan would require borrowers to pay 10% of their discretionary income and provide repayment assistance for distressed borrowers. Specifically, unpaid interest would not accrue for borrowers with an adjusted gross income of less than 300% of the federal poverty line, and half their monthly payment would go toward paying down their principal balance. Higher-income borrowers would also be eligible for these provisions if they agree to a repayment rate of 15% of discretionary income.

Common Elements and Divergent Approaches

Legislative proposals for IDR reform, together with the administration’s SAVE Plan, pursue a system that more effectively supports borrowers. These proposals revolve around four main components: automatic enrollment, simplification, preventing debt traps, and forgiveness.

Automatic Enrollment

The SAVE for Students Act would provide for automatic enrollment into the consolidated IDR plan for loans that are 75 days delinquent. The LOAN Act would require the Secretary of Education to place borrowers who are 80 days delinquent into the most affordable IDR plan. It further authorizes the Department of Education to calculate payments by using borrowers’ tax returns (with their consent) and includes provisions for documenting the income of borrowers who have not consented to share that information. Similarly, the administration’s SAVE Plan will automatically enroll borrowers who are 75 days late and who have given consent to allow the Department of Education to access their tax information. By enrolling struggling borrowers automatically into alternative repayment plans, these proposals would reduce defaults.

Simplification

The SAVE for Students Act, FAIR Act, and the SAVE Plan all contain provisions to streamline the IDR system by either reducing the number of payment options or directing borrowers to a single plan and phasing out other options.

Avoiding Debt Traps

The SAVE Plan does not charge borrowers for unpaid interest as long they make required monthly payments, while the LOAN Act would eliminate interest capitalization generally for student loans, including those in IDR plans. Conversely, the FAIR Act would provide repayment assistance for borrowers with an adjusted gross income of less than 300% of the federal poverty line, rather than fully eliminating interest capitalization.

Forgiveness

The FAIR Act would eliminate loan forgiveness in favor of the repayment assistance discussed above. Conversely, the SAVE for Students Act would provide for scaled forgiveness of low-balance undergraduate loans, beginning at 10 years for borrowers who entered repayment with $10,000 or less in undergraduate loans and extend incrementally as the loan increases in size. Loans up to $19,000 would be forgiven after 19 years of payment; all other undergraduate loans would be forgiven after 20 years. The administration’s SAVE Plan would provide similar scaled forgiveness for both undergraduate and graduate borrowers, with borrowers who took out less than $12,000 eligible for forgiveness in 10 years.

A Bipartisan Path Forward

These legislative proposals and the SAVE plan illustrate bipartisan interest in simplifying and streamlining the IDR system, but they diverge in critical ways, especially regarding which borrowers would receive relief from reforms. Policymakers working to improve the IDR system should focus on reforms that target support to struggling and low-income borrowers, while preventing those with the highest incomes from receiving a windfall at taxpayer expense. Early forgiveness and the elimination of interest capitalization can provide relief for distressed borrowers but can also benefit higher-income borrowers and those with high levels of debt from professional degrees—who are likely to be able to fully repay their loans.

To target additional relief for lower-income borrowers, BPC recommends implementing a progressive payment formula. Under such a system, monthly payment might be 5% for lower-income borrowers, with a marginal rate of 10% for middle-income borrowers and of 15% for the highest-income borrowers. This approach would target relief to borrowers who most need it.

Combining a progressive payment formula with IDR streamlining and simplification would facilitate access to IDR and improve borrower outcomes while protecting both borrowers and taxpayers. Ensuring that IDR relief is targeted will be key to finding a bipartisan, durable solution for overburdened borrowers.