We wrote a few weeks ago about the September 8 New York Times article, “Debt Collectors Cashing in on Student Loans.“ The article explains how student loan servicers and collectors lack incentives to prevent student loan defaults. Among other reasons, companies are not paid enough to talk borrowers through the federal student loan payment options and collectors are rewarded primarily for collecting as much as possible, not for making sure a borrower can afford payments.
Since then, the Times published an editorial highlighting a number of recommendations from our July “Student Loan Default Trap” report to help borrowers avoid and recover from student loan default. The editorial focuses on barriers many borrowers face when applying for the income-based repayment (IBR) plan.
The Times editorial urges the government to automatically enroll borrowers in IBR, including people on public assistance or Social Security, while they are behind on payments, before they officially default. We agree.
Borrowers receiving means-tested public assistance benefits should not only get in the program automatically, but should also be allowed to stay by proving continued receipt of public assistance benefits. There should be a straightforward form, similar to the economic hardship deferment form which requires borrowers to check a box and provide proof of public assistance payments.
Allowing automatic entry does not mean that all borrowers will choose to stay in IBR. The program works well for many, but not all eligible borrowers. The automatic entry system ensures easy access at the critical time prior to default, giving a borrower some breathing room to consider options.
The Department has taken some important steps to simplify IBR applications, but much more needs to be done. This is particularly true for public assistance recipients and others who are not required to file taxes. A system that relies on tax returns or wage receipts as proof of income doesn’t work well for some of the lowest-income borrowers. Allowing public assistance recipients automatic entry into a presumptive IBR program will go a long way toward helping the neediest borrowers avoid default. This is good policy not only for these borrowers, but also for taxpayers. Fewer borrowers in default means less money lining the pockets of collectors to hound borrowers with little or no resources. Most important, by avoiding the downward spiral of default, these borrowers have a better chance of recovering financially and if possible, going back to school or work.