About 2 Million Borrowers Missed an Opportunity to Get Their Student Debt Forgiven: Report

Less than three dozen student borrowers have seen their debts wiped out under a government program aimed at helping lower-income borrowers, a new report says.

That small slice of borrowers shows that the programs aren’t doing enough to protect borrowers from being trapped in a lifetime of debt, according to a report released this week by the National Consumer Law Center and the Student Borrower Protection Center.

The authors of the report estimate that some two million federal borrowers have been repaying undergraduate debt for at least two decades, a period of time that would have qualified them for forgiveness if they had been enrolled in the correct plan 20 or more years ago.

The findings are based in part on a public records request to the U.S. Department of Education, which revealed that as of January of this year, only 32 borrowers have received full forgiveness of their student debt after making at least 20 years of payments in an income-driven plan. One of the reasons why, the authors suggest, is that many borrowers weren't counseled properly about their options.

Nearly eight million federal borrowers today are enrolled in plans that tie their monthly payments to how much they earn. Often, the payments are less than the monthly interest accrual. But after 20 or 25 years of payments, depending on the plan, any outstanding debt is forgiven. By contrast, under standard, or balance-based, repayment plans, borrowers make equal monthly payments for a set number of years to pay off their entire balance, plus interest.

“The fact that only 32 borrowers, out of the millions paying for 20 or more years, have received cancellation through the programs created to ensure an affordable pathway out of debt is proof that those programs have failed,” Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance project, said in a press release.

Income-driven repayment is a catch-all term for four different repayment plans. Because of the relative newness of most of the income-driven plans, the only borrowers who would be eligible for forgiveness so far are those who signed up for the original version, launched in 1995. That one, called income-contingent repayment, is the focus of the new report. Today, it is the least generous and the least used income-driven repayment plan.

The brief comes at a time of debate over how much the government should be doing to help the nearly 20% of American adults who have student debt. Many progressives and borrower advocates have been pushing for widespread debt cancellation of up to $50,000 per borrower.

But others question why such an expensive policy is necessary, given that there are already ways to get forgiveness in the existing programs. Fixing the existing income-driven repayment plans so that they are easier to access would ensure that lower- and moderate-income borrowers could benefit from debt forgiveness in the future, while avoiding giving a lump sum payment now to those who would otherwise be able to repay their debt.

To be clear, people on both sides of the argument agree that the existing programs are flawed, in part because the system is so complicated to navigate. There's a lot of anecdotal evidence of borrowers who had to jump through hoops with their servicer to enroll in the programs, and to stay enrolled, borrowers have to remember to complete an income recertification every year, a step many borrowers missed in the past. (A 2020 law should improve that part of the process, at least, by making it automatic for borrowers who opt-in to data sharing between the IRS and Education Department.)

The report lays much of the blame for what it calls an "abysmal track record" on mismanagement of the program by the Department of Education and by the department's contracted loan servicers, saying that millions of borrowers could have qualified for forgiveness by now if their loans had been "competently serviced" by the companies the government hires to manage loan repayment. The authors points to regulatory reports that, among other missteps, allege loan servicers have funneled borrowers into forbearance instead of counseling them about their best repayment options.

Still, the fact the only a few borrowers have been granted forgiveness isn’t necessarily an indicator that these programs can't work, says Beth Akers, an economist and resident scholar at the American Enterprise Institute, who's written in favor of fixing income-driven repayment over widespread debt cancellation.

The programs haven't been around long enough to make that judgement, she said in an email. After income-contingent repayment, the next plan didn't open up for borrowers until 2009, and while enrollment in the plans is common now, that wasn't always the case.

Akers points instead to estimates from the Congressional Budget Office that show the share of federal loans in these plans has grown rapidly. The report predicts that of loans issued between 2020 and 2029, $40 billion worth of undergraduate debt and $167 billion worth of graduate debt will ultimately be forgiven. That, she says, is a better indication of how the programs could work.

Yu, with the National Consumer Law Center, acknowledged in an interview with Money earlier this year that income-contingent repayment was underutilized when it was first introduced. But she said that the number of borrowers who've been granted forgiveness through it was still "absurdly low."

As a fix, the report argues that the government should cancel all the outstanding debt of anyone who has been paying back undergraduate debt for more than 20 years, regardless of whether they were enrolled in the correct repayment plan.

This isn't the first report to suggest that it's difficult for borrowers to enroll and persist in repayment plans that offer forgiveness, at least in the first years after the programs were created. Initial reports on the government's Public Service Loan Forgiveness program, which grants loan forgiveness to public sector workers after 10 years of payments, also showed borrowers faced long odds of success. In 2017, the first year borrowers would have made enough payments to be eligible, less than 1% of applicants met the requirements to be granted forgiveness. The rate is still only about 2%, but some student loan experts expect approval rates will spike in the coming years.

More from Money:

Federal Student Loan Forgiveness Programs Already Exist. Why Aren't More Borrowers Taking Advantage?

Should You Keep Paying Your Student Loans Even If They Might Get Forgiven?

Would Student Debt Cancellation Shrink the Racial Wealth Gap?