Many eligible borrowers do not participate in income-driven repayment
plans. Using its income tax data and Education’s student loan data,
Treasury estimated that about half (51 percent) of Direct Loan borrowers
were eligible for IBR as of September 2012.21 Of these eligible borrowers,
an estimated 20 percent participated in IBR or ICR, the only incomedriven
repayment plans available at the time of Treasury’s analysis.
According to our review of more recent summary data from Education’s
National Student Loan Data System, 15 percent of about 11.2 million
Direct Loan borrowers in active repayment—not in deferment,
forbearance, or default—participated in IBR (13 percent) or PAYE (2 percent) as of September 2014.
Page 14 GAO-15-663 Federal Student Loans
22 An additional 4 percent of these
borrowers participated in ICR (see fig. 2). Participation in these three
income-driven repayment plans ranged from 15 percent of borrowers who
entered repayment in fiscal year 2009 or earlier to 23 percent of those
who entered repayment in fiscal year 2013.While we examined participation in IBR and PAYE as of September 2014,
publicly available data from Education show participation in these plans
has increased over time. According to Education’s data, from June 2013
to March 2015, IBR participation among Direct Loan recipients increased
from 5.8 percent to 11.7 percent, and PAYE participation increased from
0.3 percent to 2.7 percent. These percentages differ from the ones we
present based on summary data from Education’s NSLDS due to different
borrower populations and time periods for analysis.
Page 15 GAO-15-663 Federal Student Loans
23
While data on retention in IBR and PAYE are limited given the newness
of the repayment plans, we found short-term retention rates were high,
according to our review of summary data from NSLDS:
· IBR: 95 percent of Direct Loan borrowers participating in IBR with a
partial financial hardship in July 2012 remained in the plan 2 years
later (84 percent still had a partial financial hardship and paid less
than the 10-year Standard repayment amount).
· PAYE: 98 percent of borrowers participating in PAYE with a partial
financial hardship in July 2013 remained in the plan or were in IBR 1
year later (86 percent still had a partial financial hardship and paid
less than the 10-year Standard repayment amount).24
Education officials and higher education experts we interviewed said
many factors may affect eligible borrowers’ participation in income-driven
repayment plans. They said some may not be aware of IBR or PAYE,
may not understand them, or may have difficulty applying or meetingannual income certification requirements.
Page 16 GAO-15-663 Federal Student Loans
25 Education officials also noted
that some borrowers may choose non-standard repayment plans, such as
the Extended or Graduated plans, which may offer lower initial monthly
payments than income-driven plans. In addition, not all borrowers who
are aware of IBR or PAYE and are eligible choose to participate after
considering the costs and benefits. For some borrowers, the value of
lower monthly payments on IBR or PAYE may outweigh the potential
increase in total loan costs, while others may prefer to pay off their loans
sooner at a potentially lower total loan cost if they can afford higher
monthly payments on the 10-year Standard repayment plan.26
To understand the potential costs and benefits of participating in IBR or
PAYE, we created two example borrowers—Borrower A and Borrower
B—who are single with $20,000 in loan debt and different starting annual
adjusted gross incomes that increase by five percent annually (see fig.
3).For Borrower A, who begins repayment with an annual adjusted gross
income of $15,000, repaying with IBR or PAYE rather than the 10-
year Standard plan would reduce both monthly payments and total
loan costs. Under PAYE in particular, Borrower A would pay less over the life of the loan than the amount borrowed.
Page 18 GAO-15-663 Federal Student Loans
28 Moreover, in this
example, the federal government would collect less on the loan than it
would on the 10-year Standard plan.
· In contrast, for Borrower B, who begins repayment with a higher
annual adjusted gross income of $25,000, repaying with IBR or PAYE
would initially reduce monthly payments, but the total cost of the loans
would be higher than on the 10-year Standard plan. Compared to
Borrower A, Borrower B has higher total loan costs under both IBR
and PAYE due to paying more each month based on the higher
income. As a result, in this example, the federal government would
collect more on the loan from Borrower B than it would on the 10-year
Standard plan.
Many income-driven repayment plan participants had low annual adjusted
gross incomes. For those with available income data, 70 percent of IBR
participants and 83 percent of PAYE participants earned from $1 to
$20,000, according to our review of September 2014 data from Education
(see fig. 4).29 In contrast, 10 percent of IBR participants and 5 percent of
PAYE participants had annual adjusted gross incomes greater than
$40,000In addition, substantially lower percentages of IBR and PAYE participants
had defaulted on their loan compared to those in Standard repayment,
and the great majority were in active repayment as of September 2014.
Education officials cautioned against comparing default rates across
repayment plans because IBR and PAYE are newer and borrowers have
not had as much time to default. However, when we examined the status
of loans by cohort for borrowers who entered repayment in the same
fiscal year, we found IBR and PAYE participants had substantially lower
default rates than Standard plan participants. Specifically, among
borrowers who entered repayment from fiscal year 2010 to fiscal year
2014, less than 1 percent of IBR and PAYE participants had defaulted on
their loan, compared to 14 percent in Standard repayment (see fig. 6).
According to Education officials, fundamental differences between
borrowers who elect to participate in IBR and PAYE and Standard plan
participants may account for the difference in default rates. They also
noted that IBR and PAYE participants may have scheduled monthly
payments as low as zero dollars. For more information about how IBR
and PAYE participants compare to Standard plan borrowers on
characteristics such as gender, age, highest academic level, and type of
school attended, see appendix II.