When you make student loan payments on an income-driven plan, you might be in for a payment shock
Earlier this year, we asked you to share your #StudentDebtStress story. More than 30,000 of you answered, telling us about payment processing problems, servicing transfer snags, customer service confusion, and obstacles for borrowers in alternative repayment plans. You can check out the comments that were posted.
For borrowers who are experiencing financial distress and looking for a way to pay back their federal student loans, income-driven repayment plans can be the key to helping you make ends meet. But for some borrowers seeking to tie their federal loan payment to their income, we know the road can be rocky. You’ve told us about problems related to enrolling in income-driven repayment plans that ended up costing you hundreds of dollars in unexpected payments. These problems include delays in processing your paperwork and incorrect information from customer service personnel.
We’ve also heard about detours and dead ends that prevent you from keeping your payments affordable under these plans, even when you’ve filled out the required paperwork . One borrower told us :
I submitted the required documentation for the 2015 [income-based] repayment plan 8 weeks before the expiration of my previous IBR application, and within the time period [my servicer] indicated. Due to [my servicer’s]delays, my IBR application was not processed timely. While waiting for them to process my application, [my] monthly payment jumped from approximately $200 a month to $1400 a month, causing me to go into overdraft on my checking account. [My student loan servicer] failed to process my application timely even though my application was complete and no documentation was missing and failed to communicate the huge increase in payment.
Filling in the gaps
As the Bureau and other federal agencies consider ways to improve the student loan repayment process, stories like these focus our attention and raise new questions about how common these problems may be. That’s why we’re sending a letter to student loan companies asking for more information about how they make sure student loan borrowers have the information they need stay on track.
The most common income-driven repayment plans are Income-Based Repayment (IBR) and Pay As You Earn (PAYE). Each year, borrowers in income-driven repayment plans are required to submit information, generally an income tax return, proving that they still qualify for an affordable monthly payment (known as “recertification” in student loan-speak).
We’d like to learn more about how well the process of recertifying works for most people. Because student lenders and student loan servicers are not required to release this information publicly, we don’t know how many borrowers fail to recertify on time. When borrowers don’t recertify on time, their payments will snap back to the amount they would have owed under a standard 10-year repayment plan—a jump of hundreds of dollars per month, in many cases. This can be a shock to those already struggling to make these payments.
Earlier this year, the Department of Education released the first public information about recertification rates, noting that more than half of all borrowers in its sample (57 percent) missed their deadline to recertify and had their payments snap back.
What you need to know
We’ve put together some helpful advice and information for borrowers enrolled in income-driven repayment plans.
Why it’s important for your recertification to be processed on time each year
If you’re having trouble affording your federal student loan payments, getting enrolled in an income-driven repayment plan may be an important first step to staying on the road to repayment. These plans help you get a payment you can afford. If your recertification is not processed on time, it can:
- Cause the amount you owe each month to snap back to a payment you may not be able to afford. When your recertification isn’t processed on time, even if you tell your servicer you still want to keep your payments affordable, you will probably have a gap where you are required to pay an amount that doesn’t reflect your financial circumstances. You may not realize that things aren’t going according to plan until your bank has processed an automatic payment at the higher amount or you’ve been hit with surprise overdraft fees.
- Cost you thousands more over the life of your loan. When you enroll in an income-driven repayment plan, you may pay less each month than the interest that accrues on your loan. This means that your loan balance can grow over time. But these plans do offer an important protection for people who recertify on time each year and continue to qualify for a lower payment— any unpaid interest does not get added to your outstanding principal balance (so you don’t have to pay additional interest on the interest) unless you choose to leave the plan. But, if you miss your deadline to recertify, you lose this benefit. For some borrowers, this can cost thousands of dollars over the life of a loan.
- Delay the date you’re eligible for loan forgiveness (and may cause you to make unnecessary extra monthly payments). The two largest income driven plans, Income-Based Repayment (IBR) and Pay As You Earn (PAYE), feature loan forgiveness after 25 or 20 years of payments, respectively. This means that if you have high debt or low income over a long period of time, you may still have an end in sight, even if you are only making low payments. If your recertification isn’t processed on time and you need to use forbearance while your recertification is being processed, you can’t count those months toward loan forgiveness.
- Reduce the amount of interest that the government will pay on your behalf. For borrowers with subsidized federal loans, income-driven repayment plans feature another important benefit. For three consecutive years (36 months) from the time you first sign-up, the government will waive any interest charges your monthly payment does not cover, as long as you demonstrate partial financial hardship. Because the clock on this benefit starts running immediately and won’t pause even if you don’t recertify, you are giving up a benefit every month after your payments snap back.
Over the next few weeks, we’re going to keep working with leaders at the Department of Education and the Department of the Treasury to figure out how to address problems like these for student loan borrowers. Check back here for more information about what we’ve learned through our public inquiry and what comes next.
If you have questions about repaying your student loans, including questions about income-driven repayment plans, check out Repay Student Debt to find out how you can tackle your student loan debt.
If you have a problem with your student loan, you can submit a complaint online or call us at (855) 411-2372.
Seth Frotman is a Deputy Assistant Director of the Consumer Financial Protection Bureau and the Acting CFPB Student Loan Ombudsman. To learn more about the CFPB’s work for students and young Americans, visit consumerfinance.gov/students.