Do Income-Based Student Loan Repayment Programs Have Weaknesses?

Our blog has discussed income-based student loan repayment programs on several occasions. Income-based repayment plans are helpful, but they are not always perfect. These plans require borrowers to make monthly payments based on a percentage of their discretionary income.

A recent New York Times article assessed the weaknesses of America’s income-based repayment plans by comparing them to plans in Australia.

The article describes how Australia uses income-based repayment programs to reduce student loan defaults. For example, Australia requires student loan borrowers to start payments only once they begin making $40,000 per year. Student loan borrowers in Australia only pay between 4 and 8 percent of their income towards their higher education debts.

Student loan debtors in Australia make mandatory payments, meaning there is a constant accounting of income changes. If an Australian student loan debtor has their hours (and income) reduced, monthly student loan payments decrease. Payments drop right away instead of within a few months.

How do Australia’s payment methods compare to income-based plans in the United States? American borrowers using income-based repayment update their income information annually. Although borrowers can update income information whenever they want, many do not. Even when borrowers opt to update income information, it can take weeks or months for loan servicers to change monthly payment requirements. In the meantime, borrowers suffering from reduced income must continue to make payments they cannot afford.

Unfortunately, other income-based repayment programs (REPAYE and PAYE) may suffer from the same shortcomings.

How Federal Student Loan Borrowers Can Defeat IBR Weaknesses

Borrowers with federal student loans can contact their loan servicers to request unemployment deferments or forbearance. Once borrowers find another job, they can send updated income information to their servicers to readjust IBR payments. Keep in mind, employment is not required to participate in federal income-based repayment plans. Unemployed borrowers could reduce monthly federal student loan payments to $0.

Borrowers are often confused by the number of repayment options available for federal student loans. Unfortunately, student loan servicers may fail to mention these helpful options to borrowers (the Department of Education is cracking down on this practice).

If student loans have caused you confusion, we encourage you to continue following our blog for information on helpful repayment options.

The Kansas City bankruptcy attorneys at The Sader Law Firm can help borrowers find information for managing student loan payments.