MEMORANDUM

Date: October 26, 2021

To: U.S. Department of Education

From: Persis Yu and Joshua Rovenger, Negotiators for Legal Assistance Organizations that Represent

Students and/or Borrowers

Drafted in consultation with: Will Shaffner, Alternate Negotiator for Federal Family Education Loan

Lenders and/or Guaranty Agencies; Daniel Barkowitz, Negotiator for Financial Aid Administrators at

Postsecondary Institutions; Rachelle Feldman, Alternate Negotiator for Four-year Public Institutions;

Carol Colvin, Alternate Negotiator for Proprietary Institutions

Re: Proposal to Provide Defaulted Borrowers with the Benefits of Income-Driven Repayment

Despite the wide availability of income-driven repayment (IDR) plans—and significant improvements to

program design and generosity over time—too many borrowers continue to struggle with

repayment, with some even defaulting despite being enrolled in IDR.

One-quarter (25%) of all Direct Loan borrowers were either delinquent or in default at the end of 2019;

over a million Direct Loan borrowers entered default in 2019 alone. Too many of these borrowers are

never making it into IDR—which is a proven path to help many avoid delinquency and default—and even

for some who do, income-based payments can still be too high. In addition, not all borrowers—including

those who struggle most with repayment—have access to the program.

Meanwhile, borrowers who default face devastating consequences—including wage garnishment and tax

refund offsets—as well as significant hurdles in curing their default and restoring their loans to good

standing. Borrowers in default who are subject to the government’s vast extra-judicial collection powers

often pay thousands of dollars more per year than if they were in an income-driven repayment plan.

For example, a single parent with two children who works full time earning minimum wage was eligible

for a $5,800 Earned Income Tax Credit payment in 2020, which would add 39% to the family’s pretax

income and lift their family just above the poverty line. If the parent were in IDR, they would not owe

anything on their loans that year due to their income level. Yet if that borrower were instead in default,

the entire EITC credit could be seized, forcing the family to pay a huge portion of their poverty-level

income for the year toward student debt instead of necessities. Similarly, the GAO has reported on

borrowers whose social security benefits are offset to collect on student loans, yet they live below the

poverty line. These borrowers may have $0 a month payments if instead enrolled in IDR. The effect of

these involuntary collection tactics can have devastating effects on borrowers, their children, and, in

aggregate, their communities.
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These harsh realities are overwhelmingly more likely to be felt by families of color. Because of decades of

structural inequities and discrimination, student loans have burdened Black and Latinx borrowers more

than other groups, and, as a result, these borrowers default at twice the rate of their white peers.

Through the current negotiated rulemaking process, the Department of Education has the opportunity

to make borrower-centered reforms to the student loan repayment system by creating a more generous

and accessible income-driven repayment (IDR) plan (as outlined in an issue paper from the Department).

The Department’s implementation of the FUTURE Act also has the potential to help keep borrowers on

track by making it easier to get into and stay in an IDR plan.

To complement those efforts, the Department can also create additional pathways for borrowers to get

out of default and access this improved plan and ensure that repayment regulations are consistent for

borrowers whose loans are in good standing and those whose loans are in default.

We propose that the Department—in addition to the reforms that will be made to income-driven

repayment—also consider modifying income-driven repayment- and default-related regulations in

several key areas. While each of these is necessary to help struggling borrowers, neither is sufficient on

its own: They should be implemented together to holistically improve the repayment system.

(1) Create additional pathways for borrowers to get out of default and into an improved IDR plan:

For most borrowers, rehabilitation and consolidation are the only two viable paths for getting

out of default. Unfortunately, borrowers are limited in the number of times that they are

allowed to consolidate or rehabilitate their loans, leaving many borrowers stuck in default with

no way out. The CFPB found that the “vast majority (greater than 90 percent) of borrowers who

rehabilitated one or more defaulted loans were not subsequently enrolled and making IDR

payments within the first nine months after ‘curing’ a default.” Some indications suggest that the

implementation of a “warm transfer” may improve borrower outcomes. However, even with the

“warm transfer” from rehabilitation to repayment, there are still several steps between default

and income-driven repayment in which borrowers may fall through the cracks. We believe the

Department can solve this problem by amending 34 C.F.R. § 685.211(d)(ii) by adding a new

subpart:

(B) A borrower may request that the Secretary designate the income-contingent

repayment plan or the income-based repayment plan to repay the borrower’s defaulted

Direct Loans. Upon making a payment under § 685.209 or § 685.221, the loan will not be

considered in default and will no longer be subject to the penalties of default.

(2) Ensure that repayment regulations are consistent for borrowers whose loans are in good

standing and those whose loans are in default. Even with improved opportunities for borrowers

to exit default, some borrowers may still struggle to navigate the system, or may not know or
 

 

 

 

 

 

 

 

 

 

 

 

understand their options, and will likely remain in default. Borrowers who do not take

affirmative steps to exit default must still be able to access income-driven payments—and those

payments must count toward forgiveness—while in default. Currently, not only do borrowers in

default not have access to income-driven repayment (statute allows this, but current regulatory

language does not) but they also are often required to pay more in default than they ever would

while in repayment. We believe the Department can solve this problem by amending 34 C.F.R. §

685.211(d) as follows:

(d) Default—

(1) Acceleration. If a borrower defaults on a Direct Loan, the entire unpaid balance and

accrued interest are immediately due and payable.

...

(32) Collection of a defaulted loan.

(i) The Secretary may take any action authorized by law to collect a defaulted Direct

Loan including, but not limited to, filing a lawsuit against the borrower, reporting the

default to nationwide consumer reporting agencies, requesting the Internal Revenue

Service to offset the borrower’s Federal income tax refund, and garnishing the

borrower’s wages. Any amount collected per month through this section shall be

determined by taking the lesser of the amount calculated under § 685.208 (b) or (c), §

685.209, or § 685.221.

In addition to these regulatory changes, the eligibility and forgiveness sections of § 685.209 and

§ 685.221 would need to be amended to eliminate barriers for borrowers with defaulted loans.