News Column

As student debt soars, income-based program helps avoid defaults

August 10, 2014

By David Jesse, Detroit Free Press

Aug. 10--The runaway student loan debt train continues to pick up steam, data released recently by the federal government show.

Washington now holds more than $1.1 trillion -- that's trillion with a "t" -- in loans taken by 39.9 million people. That dollar amount is up by more than 112% since 2007.

And more worrisome, the number of people defaulting on their direct student loans continues to climb as well, up 24% since this time last year, according to the government data.

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That's a big deal, because student loans are not dischargeable in bankruptcy, and the government is aggressive about collecting past debt -- in some cases reaching back decades to get its money.

But experts say there's a glimmer of hope that some people are at least tapping the brakes on their personal student loan debt issues.

The number of debtors using a program tying their payments to their actual income -- which experts believe will help people avoid defaulting on the loans -- has doubled in the last year, thanks largely to an aggressive e-mail marketing campaign by the federal government.

Lisa Willis, 23, of Warren graduated from Michigan State University two years ago with about $26,000 in loans -- $2,000 under Michigan's average debt for the class of 2012. Under the standard repayment plans, she'd have 10 years to pay that off, and would pay about $275 a month on it.

But that payment's hard for her to make -- she has managed to find a job working retail that pays her about $25,000 a year. But rent and other living costs makes it hard for her to make that monthly student loan payment.

So she's enrolled in the federal government's Income Based Repayment (IBR) program, which caps her monthly payment at a maximum of 15% of her discretionary income, as determined by a federal funding formula, which has a sliding scale for payments based on federal poverty guidelines.

Willis pays about $100 a month now. The amount of her monthly payments will vary from year to year, based on how much money she makes.

But there's a trade-off. Instead of paying off her loan over 10 years, Willis will be paying for nearly 18 years, adding thousands of dollars in interest costs. Still, she's happy with the switch.

"I'd love to pay it off faster, but I just can't now," she said. "This program is helping me make sure I'm paying something at least."

Stories like that are why most experts think IBR is a good program.

"It's a positive that more people are finding these plans and using them if they need them," said Lauren Asher, the president of the Institute for College Access & Success, which helped develop the IBR program. "IBR won't prevent every default, but it's clear it is helping a lot of people."

But there are a lot more people who need help.

In the third quarter of 2013, $30.5 billion of the federal direct loan holdings were in default. There were 2.1 million debtors who were in default. That means they were at least 360 days late on their payment.

In the third quarter of 2014 -- $37.4 billion of the federal direct loan holdings were in default. There are 2.6 million people in default.

Last year, the federal government sent out e-mails alerting borrowers about the availability of the IBR program and a similar Pay As You Earn program.

It appears to have paid off. In 2013's third quarter, just under a million people were enrolled in the two programs, bringing $52.2 billion of debt with them. In 2014's third quarter, there are 1.9 million people enrolled in the program, bringing $101 billion with them.

Despite the positive signs, there are still issues.

"There are people who would benefit from it who don't use it," said Jason Delisle, director of the Federal Education Budget Project at the New America Foundation.

"I tried to talk with the company that collects my payments about it, but it was really confusing to me," said Matt Walsh, 29, of Detroit, who owes about $47,000 from his bachelor's and master's degrees. "I think it would probably help me, but I just don't understand it."

That's a common issue, despite efforts by the federal government to simplify payment calculators and the sign-up form on its website, experts said.

"IBR should help with delinquencies, but the loan servicers need to get distressed borrowers into the program," said Susan Dynarski, a professor of public policy, education and economics at the University of Michigan. "I worry that borrowers in distress, who need IBR the most, are not getting the help they need in getting signed up.

"The numbers are still very, very small, with about 2% of borrowers using an income-based plan. We need to both design better repayment plans and make it easier to sign up for them."

Delisle said there's no magic number out there to tell whether the IBR program is working. He said he'd like to see an automatic IBR program tied to payroll withholding.

Still, income-based repayment programs aren't the best choice for everyone, Asher said, nor do they solve the larger issues of college costs and rising student debt levels.

"We need to make sure there's a good repayment system to help people stay out of defaulting, but we need to work to lower costs."

Contact David Jesse: 313-222-8851 or


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Source: Detroit Free Press (MI)

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