Resource

Approximately 43 million Americans collectively owe $1.6 trillion in federal student loan debt, but this debt is not borne equally by all. Black borrowers are amongst those most negatively impacted by student loans due to the ongoing effects of systemic racism, the inequitable distribution of wealth, a stratified labor marker, and rising college costs.

Federal income-driven repayment (IDR) plans are designed to make monthly student loan payments manageable and more affordable for borrowers. Unfortunately, they are often ineffective at reducing a borrower’s debt burden over time.

Drawing on qualitative data from our National Black Student Debt Study, this brief dives into how existing IDR plans are failing Black borrowers. A higher education should be the key to a better future, but for many Black borrowers who participated in the study, student loans are a lifetime debt sentence.

While the Biden Administration has taken some strong steps in the right direction, they do not address the underlying issue of college affordability or help future students. Ed Trust has 3 broad actions that the Biden administration and Congress should take to end the student debt crisis and make college affordable.

Recommendations

1. More than 80% of the participants in the “Jim Crow Debt” study think the federal government should cancel all student debt. The Education Trust supports canceling at least $50,000 of federal student debt and opposes limiting eligibility for cancellation by income, loan type, or degree type (e.g., undergraduate vs. graduate degree).

2. In addition to total broad-based debt cancellation a new IDR plan that includes the following features should be created in place of existing plans:

UPDATE: This brief was published contemporaneously with news that the Biden-Harris administration’s student debt cancellation program has been halted by federal judges. In light of this, The Education Trust supports an extension of the current payment pause for all federal borrowers for the duration of these legal actions. In the interim, we also encourage the U.S. Department of Education to explore all existing pathways to ensure borrowers receive cancellation, including the ongoing income-based repayment rulemaking process.

  • Raises protected income threshold to 300% or more of the federal poverty line, depending on a borrower’s family size
  • Caps monthly payments at 5% or less of a borrower’s discretionary income
  • Has a time to cancellation of 10 years or less, regardless of original loan balance, and shortens time to cancellation for Public Service Loan Forgiveness to eight years.
  • Cancels a portion of the outstanding balance after every 12 months of payments, with full cancellation of the outstanding balance after 10 years or 120 monthly payments.
  • Allows borrowers to request a lower IDR payment in times of economic hardship (e.g., due to major medical expenses or debt, the need to pay for child care, elder care, or other dependent care)
  • Subsidizes interest for borrowers whose monthly payments do not cover all accrued interest and does not add interest to borrower’s original loan balance during repayment
  • Is available to undergraduate and graduate borrowers with the same terms
  • Is available to borrowers with Parent PLUS loans (without the need to consolidate)
  • Is available to borrowers of all income levels
  • Makes student debt cancellation via IDR tax-exempt

3. To make college more affordable, Congress should double the Pell Grant and create federal-state partnerships to make public college debt-free.

Dive Deeper Into the Brief

Brief Overview of Income-Driven Repayment Plans

Income-driven repayment plans are designed to make monthly federal student loan payments more affordable for borrowers early in their career and reduce delinquency and default, which occurs after a borrower misses 270 days (approximately nine months) of payments. There are four types of IDR plans: Income-Contingent Repayment (ICR), Income-Based Repayment, Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). These plans have different terms and eligibility requirements.

 Income
Protection
Allowance
Percentage of
Discretionary Income
Time to
Cancellation
Eligibility/Loan Types
Income-Contingent Repayment Plan (ICR Plan)100% of federal poverty lineLesser of the following: 20% or what you would pay on repayment plan
with a fixed payment
over 12 years adjusted
according to your income
25 yearsAny borrower with eligible federal student loans Parent PLUS borrowers who consolidate their Direct PLUS Loans or Federal PLUS Loans into Direct Consolidation Loan
Income-Based Repayment Plan (IBR Plan)150% of federal poverty lineGenerally, 10%, if you’re a new borrower on or after July 1, 2014

Generally, 15%, if you’re
not a new borrower on or after July 1, 2014
20 years, if you’re a new borrower on or after July 1, 2014Monthly payment under PAYE or IBR plan can’t be higher than your 10-year standard
repayment plan
Pay As You Earn Repayment Plan (PAYE
Plan)
150% of federal poverty lineGenerally, 10%, but never more than 10-year standard repayment plan
amount
20 yearsMonthly payment under PAYE or IBR plan can’t be higher than your 10-year standard repayment plan

Must have no Direct Loan or Federal Family Education Loan (FFEL) when you
receive a Direct Loan or FFEL Program loan on or after Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011
Revised Pay As You Earn
Repayment Plan (REPAYE
Plan)
150% of federal poverty lineGenerally, 10%20 years, if all loans you’re repaying under the plan are for
undergraduate study

25 years, if any of your loans are
for graduate or professional study
Any borrower with eligible federal student loans

Direct subsidized and unsubsidized Loans

Direct PLUS Loans made to
students

Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents

For Black Borrowers, Income-Driven Repayment Plans are Often a Lifelong Debt Sentence

Racial pay and wealth inequalities leave many Black borrowers with no option but to turn to IDR plans. According to federal data, 45.4% of Black Borrowers say they are very likely to use IDR plans, and 23.4% say they are somewhat likely to use them, compared to 25.7% and 22% of White borrowers. Twelve months after completing a bachelor’s degree, 33.7% of Black Borrowers were enrolled in an IDR plan, a higher percentage than any other racial or ethnic group.

Many Black borrowers will be paying their student loans for the foreseeable future. Of those who began their postsecondary education in 2004, only 11.7% had fully repaid their federal student debt 12 years later — i.e., by June 30, 2015. Only 3.3% had fully repaid their loans without defaulting or having a portion of their loan discharged. During this same time frame, only 26.5% of Black borrowers managed to pay off at least one federal loan in full – less than any other racial or ethnic group.

Existing Income-Driven Repayment Plans Don’t Prevent Many Black Borrowers From Defaulting or Using Forbearance

Black borrowers have the highest forbearance and default rates of any group. Nearly 49% of Black borrowers defaulted on their loans within 12 years of starting college. Default occurs when a borrower misses nine months of payments on a federal student loan. It can ruin a person’s credit and make it harder to rent an apartment, buy a car or home, or even get a job. In addition, if a borrower defaults on a federal student loan, the government may garnish their wages and Social Security income or withhold tax refunds and other public benefits.

Forbearance is an option that allows struggling borrowers to temporarily pause monthly payments. However, using forbearance increases the amount owed on a loan, as interest continues to occur. At the end of the forbearance, that accrued interest is added to the principle, meaning that going forward, interest will accrue on this new, higher principle balance. Forbearance is costly and 78% of Black borrowers have used it.

How Loan Servicers Undermined Income-Driven Repayment Plans

To ensure that borrowers aren’t making payments indefinitely, many IDR plans promise that after 20 or 25 years of making qualifying payments a borrower’s remaining loan balance will be canceled. However, data from the U.S. Department of Education shows that of the 2 million borrowers who were eligible for IDR loan cancellation in 2019, only 32 of them have had their outstanding debt canceled.

Loan servicers are at least partly to blame. Servicers are responsible for placing borrowers into payment plans; managing billing, forbearances, and deferments; collecting and tracking borrowers payments and balances; and submitting reports to credit bureaus; and, therefore, play a key role in the student loan repayment process. However, they are failing to effectively track payments and maintain accurate records. Documents from the Department of Education show that loan servicers have even purposely steered borrowers into forbearance instead of IDR plans. This hurts borrowers with low income because the time spent in forbearance does not count towards cancellation, and loan interest continues to accumulate.

How the Federal Government Plans to Address Debt Cancellation and Income-Driven Repayment Plans

In April 2022, the U.S. Department of Education created a plan to assist borrowers who were steered into forbearance by loan servicers. First, the government will automatically count the payments of borrowers who were in forbearance for longer than 12 consecutive months, or more than 36 months total, toward IDR cancellation. Additionally, payments made by borrowers will count towards cancellation, even if they were not in an IDR plan. These changes will allow an estimated 3.6 million borrowers to get three years of credit toward cancellation, and an estimated 40,000 borrowers could have their debt completely canceled.

In August 2022, the Biden administration announced a plan to cancel $10,000 in federal student loans for individual borrowers with incomes below $125,000 or $250,000 for married couples filing jointly or head of households in 2020 or 2021. Pell Grant recipients and those who qualify otherwise are eligible for up to $20,000 in cancellation. Only federal student loans disbursed before June 30, 2022, qualify.

Additionally, the administration proposed a new income-driven repayment plan that would raise the protected income threshold from 150% of the federal poverty line to 225% of the federal poverty line and cap monthly payments for undergraduate loans at 5% of discretionary income. Monthly payments for graduate loans would be based on a “weighted average rate.” If a borrower’s monthly payment is less than the monthly interest, the government will cover the remaining interest. In addition, borrowers with initial balances of $12,000 or less could have their remaining balance canceled after making qualifying payments for 10 years. Full details of the proposed plan have yet to be released. The payment pause for federal student loans has been extended to December 31, 2022.

UPDATE: This brief was published contemporaneously with news that the Biden-Harris administration’s student debt cancellation program has been halted by federal judges. In light of this, The Education Trust supports an extension of the current payment pause for all federal borrowers for the duration of these legal actions. In the interim, we also encourage the U.S. Department of Education to explore all existing pathways to ensure borrowers receive cancellation, including the ongoing income-based repayment rulemaking process.

Explore Ed Trust’s Other Research on the Black Student Debt Crisis