Student Loan Repayment: How Income-Driven Plans Impact Borrowers

Excerpts below are from the original article written by Thomas Conkling and Christa Gibbs for The Consumer Financial Protection Bureau. The full original article can be found here.

Student loans are now the largest non-mortgage form of debt held by consumers in the U.S. As student loan burdens have grown, the federal government has introduced several income-driven repayment (IDR) plans to reduce financial distress for borrowers by setting payments for federal student loans based on borrowers’ incomes and family sizes. It is worth noting that while IDR plans are effective, income share agreements (ISA) in particular offer enhanced protection over other IDR-type plans and are therefore regarded by many as the safest for students.

The Consumer Financial Protection Bureau has released a new Data Point describing how borrowers fare on IDR plans. This Data Point provides new background on which types of student loan borrowers use IDR, how their delinquencies on student loans and other credit products evolve as they transition onto IDR and thereafter, and borrower experiences with the enrollment recertification process. This research uses the Bureau’s Consumer Credit Panel (CCP), which is a panel of a nationally representative 1-in-48 sample of de-identified credit records, to identify and analyze likely IDR borrowers and to provide broader and more comprehensive statistics on IDR borrowers over the past decade.

Key findings of this report include:

• For borrowers with partial payment relief, delinquencies decreased 19 to 26 percent one year into IDR enrollment relative to the quarter before enrollment. And, overall, the share of borrowers actively in repayment on their loans was 27 percent higher at the end of borrowers’ first year in IDR than just before IDR enrollment.
• For delinquent student loan borrowers, IDR enrollment was followed by a 17 percent reduction in delinquencies on other credit products, suggesting broader improvements across their entire household budget. 
• About two-thirds of borrowers recertified their IDR enrollment for a second year immediately or within two months after the initial IDR period ends. 
• Borrowers who recertified on time also had the lowest delinquency rates on other credit products before enrolling in IDR and were able to lower those rates further while repaying under IDR, while delinquency rates improved gradually among those who recertified after their first year.

This Data Point focuses only on one outcome related to IDR: near-term delinquencies following enrollment in IDR. A full assessment of IDR would look at additional outcomes and effects. Nonetheless, this Data Point helps the Bureau and other researchers and policymakers understand how consumers repay their student loans and how that behavior affects their use of other financial products, important evidence not only for monitoring these markets, but also as one input into the more comprehensive discussion around the IDR program.