In January, the Biden administration proposed several changes to income-driven repayment (IDR) for student loans. Though most attention has focused on the lower monthly and total payments, the proposed rule would also automatically enroll delinquent borrowers in IDR. This change alone could cut early defaults by half, and the administration’s plan to raise the level of income exempt from payments could reduce early defaults even further.
Borrowers eligible for $0 payments would benefit most from automatic enrollment
Currently, borrowers enrolled in IDR with incomes below 150 percent of the federal poverty level ($21,870 for a single person) are eligible for $0 monthly payments—that is, they pay nothing but remain current on their loans.
However, these borrowers must proactively enroll in IDR, and more than 40 percent of undergraduates don’t know about the program. And even after enrolling in IDR, borrowers must recertify their incomes and family sizes annually. This is an additional burden that keeps many of them from benefiting from the program, and evidence suggests fewer than half of borrowers in IDR recertified on time.
Automatic enrollment in IDR is meant to solve these problems. And now that the US Department of Education will be able to access borrowers’ tax information through implementation of the FUTURE Act (PDF), automatic enrollment is possible. IDR could prevent a substantial number of defaults, particularly for borrowers eligible for $0 monthly payments because they have incomes below the exemption level.
The administration’s new proposal also raises the income exemption level to 225 percent of the federal poverty level ($32,805 for a single person). As a result, more borrowers will be eligible for $0 monthly payments, and more defaults could be prevented with automatic enrollment.
Automatic enrollment could prevent most defaults
To estimate the share of defaults that could be prevented by automatic enrollment in IDR, I examine a cohort of borrowers who began postsecondary education in the 2011–12 academic year and defaulted on their student loans between three and four years after entry. About half (52 percent) would have been eligible for $0 payments in IDR because their incomes leading up to default were below 150 percent of the federal poverty level, suggesting at least half of these defaults could be prevented with automatic enrollment in IDR. (We know these borrowers were not enrolled in IDR because, had they been, they would have been making $0 payments and would not have defaulted.)
An even higher share (85 percent) of these defaulted borrowers had incomes below 225 percent of the federal poverty level, the higher exemption level proposed in the new IDR plan. This suggests that under the new plan, more than 8 in 10 of these early defaults could be prevented with automatic enrollment in IDR. Among borrowers who defaulted between five and six years after entry, a smaller—but still substantial—share had incomes below the current and proposed thresholds (34 and 62 percent).
But these estimates have some caveats. The data I examined are for individuals; in households with more than one person, the level of income exempt from payments is higher, though household income may also be higher. Further, though I focus on borrowers eligible for $0 monthly payments, many borrowers who default with incomes above the exemption level could also benefit from making lower payments in IDR. These estimates also only include the incomes of borrowers who are working, excluding those who are unemployed and likely eligible for $0 payments. Accounting for this, the share of defaults prevented by automatic enrollment may be higher than these estimates suggest.
Protections would remain targeted to borrowers in most need of support under a higher income exemption level
On the whole, borrowers who default on student loans are less likely to have completed a degree or credential than the average borrower and are more likely to have received a Pell grant. Because of labor market discrimination and gaps in inherited wealth, among other structural barriers, they are also more likely to be Black or Latinx. The demographics of borrowers currently eligible for $0 payments mirror the demographics of those who default on loans.
But the racial and ethnic makeup, degree completion, and Pell grant status of borrowers who would be newly eligible for $0 payments under the proposal’s higher income exemption level would remain largely the same as under current policy. The higher exemption would slightly decrease the share of those eligible for $0 payments who are Black or Latinx and minimally affect the shares who didn’t complete a degree or who received a Pell grant. That is, the higher income exemption level the new plan proposes still targets protections to the borrowers who need them the most.
Until automatic enrollment is implemented, borrowers need better awareness of IDR plans
As the Department of Education prepares to implement automatic enrollment in IDR for delinquent borrowers, my analysis of data on a cohort of borrowers who started school in 2011–12 reveals that the policy would likely prevent more than half of defaults in the early years after entering higher education. And though automatic enrollment is the key factor in preventing defaults, raising the income exemption level makes its effect larger without substantially changing the demographic makeup of borrowers whose full incomes are exempt from payments.
Although automatic enrollment would provide significant benefits to borrowers, it will only be possible through implementation of the FUTURE Act, which requires adequate funding (PDF) for the Office of Federal Student Aid (FSA). But FSA’s resources are limited this year, which may delay implementation of the FUTURE Act, meaning automatic enrollment in IDR could still be far off. And only borrowers who provide approval for the Internal Revenue Service to share their tax information can benefit from automatic enrollment, so providing this approval should be simple and accessible for all borrowers.
Until automatic enrollment is a reality, student loan servicers can help prevent default by ensuring every borrower who could benefit from IDR is aware of the program and how to use it.