- Only 32 borrowers got student loan forgiveness through income-contingent repayment (IDR) plans.
- A NerdWallet report found that forgiveness is rare to obtain due to the high interest rates that come with debt.
- Biden recently simplified paperwork for the IDR, but supporters say ongoing reforms are needed.
Income Oriented Repayment Plans are one of the most common ways for student borrowers to pay off their debt burden, as the plans aim to establish financially feasible monthly payments.
But while these plans are expected to write off borrowers’ remaining balances after at least two decades of repayment, only 32 borrowers have already received relief. A new report explains why.
NerdWallet – an American financial company – published a report on Tuesday which found that while income-contingent repayment (IDR) plans are seen as a “safety net” for borrowers who are struggling to repay their loans, their promise of loan forgiveness after two decades is rarely fulfilled due to high interest rates and high taxes.
According to the report, most borrowers with student debt of $129,500 — the maximum amount of direct federal undergraduate and graduate loans a borrower can take — are more likely to see loan forgiveness through an IDR plan, but they will pay “exorbitant interest at the time of forgiveness – often as much, if not more, than the amount forgiven,” the report said.
As Insider previously reported, IDR plans allow borrowers to sign up for a plan where monthly payments are set to a portion of their income, and depending on the types of loans they have, the repayment period is either 20 years, for undergraduate debt, or 25 years. years, for consolidated loans that include graduate debt. And once this repayment period is over, these borrowers are supposed to see their remaining balances wiped out.
NerdWallet analyzed the results of current federal direct loan caps — $27,000 for undergraduates and $129,500 for those with undergraduate and graduate debt — and assessed the effectiveness of the IDR if borrowers stay on track with their payments and their income grows 3% year over year. Its key findings included:
- Borrowers who start with salaries ranging from $40,000 to $100,000 will have paid off their debt before they can get forgiveness.
- Only borrowers with starting salaries of $20,000 to $30,000 will have their debt forgiven after 20 years of payments.
- Borrowers with high debt will pay interest in excess of the full principal amount – plus a high tax bill, assuming the current rule that loan forgiveness is not taxable income expires as planned in 2025 .
Not only is it difficult to get loan forgiveness through IDR, but just registering for the program can be a burden. That’s why President Joe Biden announced in December that he would make it easier for borrowers to access IDR by allowing borrowers to self-report their income to apply for or recertify for the program, easing the paperwork process. .
But proponents still say reforms to the program are warranted to ensure borrowers can afford to pay off their student debt. In early January, the Student Borrower Protection Center, along with the Center for Responsible Lending and the National Consumer Law Center, developed recommendations for the program. They included implementing a waiver that retroactively counts all payments made by a borrower since they began repayment toward forgiveness, as well as providing automatic relief to avoid additional paperwork.
Still, federal student loan payments are set to resume on May 1, and after extending the pause for the third time in December, Biden urged borrowers to take advantage of loan repayment programs including IDR as he exists, during the period of additional relief.
“I’m also asking all student borrowers to do their part: Take full advantage of the Department of Education’s resources to help you prepare for the resumption of payments; Explore options for lowering your payments through repayment plans based on income; explore service loan cancellation; and make sure you get vaccinated and boosted when you’re eligible,” Biden said.