If you’re overwhelmed by your federal student loans, the simplest way to get a reprieve is to apply for one of the government’s income-driven repayment plans. Under these plans, borrowers can see their payments drop to as little as 10% to 15% of their discretionary income. In cases where borrowers’ debt far exceeds their annual income, their required payments can drop to $0.
What few borrowers realize, however, is that they have to renew their income-driven plan each year. Since eligibility for these plans depends on a borrower’s income, family size, and state of residence, borrowers need to send loan servicers — companies contracted by the federal government to manage outstanding federal student loans — new documents to prove they still qualify each year.
There are currently 3.9 million borrowers enrolled in income-driven plans, according to data from the National Student Loan Data System. In April, the Department of Education (DOE) looked at a sample of 1.2 million borrowers enrolled in income-driven plans. The agency found that more than half — 57% — missed the deadline to reapply a year later. As a result, 31% of borrowers who missed their deadline had to claim financial hardship and put their loans into deferment or forbearance. It’s not clear from the report how many of the borrowers who missed payments became delinquent on their loans (missing one payment) or went into default (payments are 270 days past due).
People who fail to recertify their plan could be in for a nasty shock the next time they open their student loan bill. Their required monthly payment will revert to whatever they would have owed under the standard 10-year repayment plan. Because income-driven plans are based on repayment periods of 20 to 25 years, some borrowers could see their bills double.
The DOE is working on new strategies to keep borrowers from missing renewal deadlines. One idea is to have the IRS automatically send income information to borrowers’ loan servicers, which would eliminate a lot of annoying paperwork on the borrower’s end. At the moment, the onus is on loan servicers to send reminders to borrowers when their renewal deadline is approaching (their contracts with the DOE require them to send at least two notices within 90 days of a borrower’s renewal deadline). Media requests sent to five of the government’s largest contracted loan servicers were forwarded to a DOE spokesperson. The DOE provided Yahoo Finance with information for two of the five servicers, Navient and Great Lakes, which showed they use a mix of email, texts, letters, and phone calls to urge borrowers to meet their deadlines.
Better communication with borrowers would make all the difference, says Natalia Abrams, founder of Student Debt Crisis, a nonprofit advocacy group. In a recent survey by the group, more than half of student borrowers surveyed said their loan servicers did not tell them about income-based repayment plans.
“I know from hearing from thousands of borrowers that people are not finding out about these programs from federal authorities as much as they could be,” Abrams says. “We don't feel the department and the loan servicers are doing their job.”
What’s clear from the DOE’s data is that tens of thousands of borrowers are unnecessarily getting bumped out of income-based repayment plans they sorely need. And the consequences of missing the deadline to recertify go far beyond higher monthly payments. Many people in income-based plans qualify for a benefit that prevents unpaid interest from being added to the principal of the loan. Once they’ve been bumped from their plan, they forfeit this benefit. Depending on how long it takes them to reapply, it could wind up costing thousands of dollars over the lifetime of the loan.
Borrowers also run the risk of prolonging the time it will take to qualify for loan forgiveness, which eliminates all remaining student debt. Depending on the type of income-driven plan borrowers are eligible for, they can qualify for loan forgiveness after 20 or 25 years’ worth of on-time payments. If you miss the deadline to renew your plan and have to put your loan into forbearance because you can’t afford the new, higher payment, you can’t count those months toward your on-time payments.
Don’t miss the deadline to recertify your repayment plan.
How to renew: If you miss the deadline to renew, you can reapply anytime. Call your federal student loan servicer directly to determine your eligibility and they will point you to the forms you need. In most cases, they’ll direct you to an online application and ask you to submit proof of income (like a W-2). Keep in mind that income-driven repayment plans work by extending the amount of time you have to pay off your loans, which will lead to a lower monthly payment but may end up costing you more in the long run. The longer you take to pay off your loan, the more interest will accrue over that time.
Don’t spend money. Applying for federal programs like income-driven repayment plans should never cost any money. Steer clear of companies that offer student debt relief services and claim they’re affiliated with the government. They aren’t, and they make a killing by convincing unwitting borrowers to pay for services they can easily get for free.
Check out options for loan forgiveness. People who work in public service can apply for loan forgiveness after they make 10 years worth of on-time payments (they do not have to be consecutive). The program allows borrowers to count payments going back to October 2007. The form is also free and can be downloaded here.
Have you run into issues applying for income-driven repayment plans or loan forgiveness? We want to hear from you: email@example.com