Is Income-Driven Payment Right for Your Borrowers?

Posted 6/14/2023

High inflation, an uncertain job market, and the pandemic’s economic fallout have left student loan borrowers financially vulnerable. The resumption of student loan payments will be more than many household budgets can handle.

Income-Driven Repayment (IDR) plans may be able to help. IDR plans are designed to align a borrower’s monthly payment with their income which makes it easier for borrowers to avoid student loan delinquency.

However, IDR isn’t a one-size-fits-all solution. It can be confusing to navigate, and the borrower must file annual paperwork. If your goal is to improve student loan borrower outcomes, you need a targeted outreach campaign that guides borrowers to the right plan and helps them keep their eligibility.

Which Borrowers Do Income-Driven Repayment Plans Benefit?

IDR plans prioritize short-term needs over long-term savings. Sticking to a Standard Repayment plan can save a borrower thousands of dollars compared to any of the IDR plans. Borrowers who can afford Standard Repayment should be encouraged to stick with it.

Borrowers whose monthly payment simply doesn’t fit in their budget might find an IDR plan worth the added cost. In exchange for higher repayment costs, they gain financial stability, a stronger credit history, and less stress. If it’s a plan that suits them long term, they also may benefit from having a portion of their balance forgiven after 20-25 years of on-time payments.

How Effective are Income-Driven Repayment Plans?

In a recent study, economist Daniel Herbst found IDR plans have a big impact on borrower’s budgets and student loan delinquency. He analyzed a group of 133,630 borrowers who were guided into IDR plans by a large loan servicer and compared them to a similar group of borrowers who remained in Standard Repayment.

Herbst discovered that IDR enrollees enjoy several advantages over their Standard Repayment peers. These included:

• Delinquency rates 22% lower than the Standard Repayment group
• Monthly student loan payments reduced by an average of $172
• Balances in the first year are paid down at an average rate of $36 per month while the Standard Repayment group’s balances GREW at an average rate of $4 per month.

Herbst’s findings align with Student Connections’ experience. On average, our clients saw an average cohort default rate of only 1.3% for borrowers enrolled in an IDR plan. That compares to a national average default rate of more than 9%.

Policy proposed by the Department of Education (ED) could make IDR even more attractive. Among many changes, ED hopes to dramatically reduce borrowers’ monthly payment amount. The proposed plan would result in a 50% increase in the income level that would qualify for zero-dollar monthly payments.

Why You Need an Income-Driven Repayment Outreach Plan

Outreach programs are necessary because of the emotional and mental barriers that stand between financially vulnerable borrowers and success. Stress, fear, and confusion must be addressed.

Borrowers who are afraid to do anything will fall into delinquency and incur financial penalties. Those who investigate their options can be easily overwhelmed by information and choice.

The four individual IDR plans are effective tools if used properly. Choosing the best option requires a lot of research and understanding of complex financial concepts. It’s a lot of work, and without proper guidance the borrower is likely to either make a poor decision or just kick the can down the road.

IDR enrollees face another stumbling block. In addition to the initial application, they must file a recertification form EVERY YEAR they stay in the program. Seems easy, but Herbst’s study shows most IDR enrollees fail to recertify and are dumped back into Standard Repayment.

How Can You Help Your Borrowers?

Borrowers clearly need help, and that’s what Student Connections provides. Our outreach approach proactively identifies borrowers at risk of delinquency and contacts them directly. We use a blend of phone calls, emails, text messages, social media posts, live chat, and chatbot to connect your former students with the information they need to succeed.

Our team of experienced Borrower Advocates provide one-on-one assistance, acting as your borrowers’ ally. We take the time to learn about their individual needs, and ensure they enroll in a program that suits them. We’ll even walk them through the application process. We’ve been at it for over 60 years — assisting more than 700,000 borrowers throughout the payment pause alone.

Take action today! As the payment pause nears its conclusion, we expect a massive influx of students in need.