Student-loan borrowers with higher debt loads are more likely to get forgiveness through income-driven plans — but they’ll have to pay ‘exorbitant interest,’ report finds

  • Only 32 borrowers have received student-loan forgiveness through income-driven repayment plans.

  • A NerdWallet report found forgiveness is rare because of high interest rates that accompany debt.

  • Biden recently eased paperwork for IDR, but advocates say permanent reforms are needed.

Income-driven repayment plans are one of the most common ways student-loan borrowers opt to pay off their debt, given the plans are intended to craft financially feasible monthly payments.

But while those plans should forgive borrowers’ remaining balances after at least two decades of repayment, only 32 borrowers ever have experienced that relief, and a new reports sheds light on why.

NerdWallet — an American finance company — released a report on Tuesday that found while income-driven repayment (IDR) plans are viewed as a “safety net” for borrowers who struggle to pay back their loans, their promise of loan forgiveness after two decades is seldom fulfilled because of high interest rates and high taxes.

According to the report, most borrowers with $129,500 in student debt — the maximum amount of federal undergraduate and graduate direct loans a borrower can take out — are more likely to see loan forgiveness through an IDR plan, but they’ll pay “exorbitant interest at the time of forgiveness — often as much, if not more, than the amount forgiven,” the report said.

As Insider previously reported, IDR plans allow borrowers to enroll in a plan where monthly payments are set at a portion of their income, and depending on the types of loans they have, the repayment period is either 20 years for undergraduate debt, or 25 years for consolidated loans that include graduate debt. And after that repayment period is completed, those borrowers are supposed to have their remaining balances wiped out.

NerdWallet analyzed outcomes for current federal direct loan maximums — $27,000 for undergraduates and $129,500 for those with undergraduate and graduate debt — and assessed IDR’s effectiveness if borrowers stay on track with payments and their income rises 3% year over year. Its main findings included:

  • Borrowers who start with salaries ranging from $40,000 to $100,000 will have paid off their debt before they could earn forgiveness.

  • Only borrowers with starting salaries of $20,000 to $30,000 will ever see their debt forgiven after 20 years of payments.

  • Borrowers with high amounts of debt will pay interest that’s above the total principal amount — along with a high tax bill, assuming the current rule that loan forgiveness is not taxable income expires as planned in 2025.

Not only is it difficult to receive loan forgiveness through IDR, simply enrolling in the program can be a burden. That’s why President Joe Biden announced in December he will be making it easier for borrowers to access IDR by allowing borrowers to self-report their income to apply or recertify to the program, easing the paperwork process.

But advocates still say reforms to the program are warranted to ensure borrowers can afford to pay off their student debt. In early January, the Student Borrower Protection Center, along with the Center for Responsible Lending and the National Consumer Law Center, devised recommendations to the program. They included implementing a waiver that retroactively counts all payments a borrower made since they entered repayment toward forgiveness, along with providing automatic relief to avoid additional paperwork.

Still, federal student-loan payments are set to resume on May 1, and after extending the pause for a third time in December, Biden urged borrowers to take advantage of loan-repayment programs, including IDR as it exists, during the additional relief period.

“I’m asking all student loan borrowers to do their part as well: take full advantage of the Department of Education’s resources to help you prepare for payments to resume; look at options to lower your payments through income-based repayment plans; explore public-service loan forgiveness; and make sure you are vaccinated and boosted when eligible,” Biden said.

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