By Nataly Sabharwal, Collaborative Lead, and Sarah Austrin-Willis, Senior Director, Financial Health Network
Student debt remains a critical topic for both borrowers and policymakers. Many borrowers now face the added financial challenge of unemployment as a result of the pandemic, and policymakers are urgently seeking ways to support these individuals.
Now consider that Black and Latinx borrowers are disproportionately affected by the economic fallout from the pandemic, while also bearing a disproportionate student loan burden. Among borrowers who started college between 1995 and 1996, 26% defaulted on their loans within 20 years. For Black and Latinx borrowers, this percentage rises to almost half (49%) and one-third (33%), respectively.
Armed with this information, the Financial Solutions Lab (FSL) Collaborative developed a pilot program to support struggling borrowers. In addition, the Collaborative convened a group of think tanks, practitioners, and policy experts to discuss relief options for distressed borrowers. A takeaway from this discussion was that innovations from private and nonprofit groups alone cannot bring change at the scale required to help these borrowers. The group identified two areas where policy or technology innovation could have a significant impact in helping distressed borrowers – autoenrollment in income-driven repayment (IDR) plans and debt cancellation.
Results from the 2020 Collaborative: Responding to the Unemployment and Student Loan Crises
The Financial Solutions Lab’s Collaborative program recently looked at solutions to help low- to moderate-income borrowers impacted by the twin crises of student debt and unemployment. Given the need to act quickly, the program focused on fintech and nonprofit solutions that could target distressed borrowers, leading to data-driven interventions implemented by the Student Borrower Protection Center (SBPC) and Student Debt Crisis (SDC). The program demonstrated the impact of data and nonprofit interventions in helping borrowers navigate relief options. Learn more about the outcomes from the 2020 Collaborative program, including the new solutions from SBPC and SDC.
Policy and Technology Innovation: Income-Driven Repayment Plans
From the Collaborative convening, participants identified IDR plans as a blend of policy and technology innovation with the potential for far-reaching impact. Once a federal loan borrower has opted in, IDR plans are designed to mitigate their risk of defaulting on their loans. They could be a critical option for borrowers once the forbearance period ends on September 30, 2021. Over 90% of student loan portfolios are federal loans, yet there are multiple roadblocks to effective access and use of IDR plans.
Partners of the Collaborative signaled that borrowers are often unaware of the payment options and benefits available to them, such as IDR plans. Based on a survey conducted in May 2020, more than 24% of Black borrowers did not know that their federal loan payments were paused as part of the CARES Act (compared with less than 19% of White borrowers). Borrowers have also faced confusion during the application process around the eligibility and calculation of monthly payments for IDR plans. Even for borrowers enrolled in an IDR plan, the recertification process is cumbersome. Borrowers who have faced a loss of income recently, such as unemployment, have to use a manual, paper-based process to verify income.
A few options that may mitigate these challenges include:
- Innovations by fintechs and nonprofits around the existing system to help borrowers navigate friction in the system. For example, SBPC and SDC targeted eligible borrowers to make them aware of IDR plans. FSL portfolio companies, such as Summer and FutureFuel, help borrowers navigate eligibility and a complex application process for IDR plans. Longer-term policy changes can remove some of this friction altogether.
- Policy levers like autoenrollment and recertification of IDR plans have the greatest potential to remove many of these obstacles altogether, according to Collaborative participants. Automatic annual recertification would determine eligibility based on available data across agencies, rather than requiring an application. Going further, the ability to determine loss of income automatically could help unemployed borrowers avoid a manual process to verify income. The IRS and Social Security Administration (SSA) are discussing potential data sharing policies, which would eliminate one hurdle for borrowers by making the certification process easier. The IRS could also share income tax information with the Department of Education to identify and target IDR-eligible borrowers more easily.
One consideration for autoenrollment is deciding who would have the authority to determine borrower eligibility and whether IDR plans are the best repayment option for them. For certain borrowers, state and local agencies may be better positioned to determine which borrowers qualify for IDR plans. As an example, state unemployment insurance agencies serve the same individuals who are very likely to qualify for zero or very low payments through IDR plans because of their income levels. Agencies are also discussing other policies to improve IDR plan access and use, including the duration of payments and the period after which the debt is entirely forgiven, which would complement autoenrollment in these plans.
Policy Pivots that Can Help High-Risk Borrowers: Debt Cancellation
Considering the unprecedented numbers of student loan borrowers in precarious financial situations, participants from the Collaborative’s convening agreed that broad-based debt cancellation was an area where policy could provide relief to distressed borrowers at scale.
Even at relatively small amounts, debt cancellation could help massive numbers of borrowers – over 40% of student loan borrowers have less than $10,000 in debt. This thinking aligns with thought leadership from the public and private sectors, and the new administration is actively discussing debt cancellation options. While this would not eliminate debt entirely, it would provide some relief to unemployed student loan borrowers.
Even with partial or targeted debt cancellation, borrowers with remaining debt would continue to need relief, particularly in the current crisis. This is where the IDR recommendations above would be important.
The Role of Fintechs and Nonprofits in Shaping New Policies
Fintechs and nonprofits should understand the policy reforms that could impact their work, and many of them are already playing a role in shaping the policy discussion. These changes would also reframe where private and nonprofit support can be most valuable in helping unemployed student loan borrowers. In summary:
- IDR autoenrollment and debt cancellation are policy levers that can help student loan borrowers, and fintechs and nonprofits are working now to advance these ideas.
- Debt cancellation would pull many vulnerable borrowers out of the student debt system, but distressed borrowers above the targeted cancellation level would still need additional support.
- IDR enhancements, such as autoenrollment, would allow current interventions to focus more on helping borrowers manage debt than the tactical steps to participate in these IDR plans. In situations of financial stress, such as unemployment, student debt payments are often the first expense that borrowers forgo because of pressure from competing debt and expenses.
While participating in policy discussions can be intimidating, there are resources and best practices to help fintechs and nonprofits get involved and advocate for the customers and communities they serve.
Contact us at email@example.com to connect with the Collaborative 2020 program grantees, Student Borrower Protection Center and Student Debt Crisis, who are actively involved in these policy discussions and looking to scale their work to support borrowers in need.