United States General Accounting Office

GAO Report to the Chairman, Committee on

Education and the Workforce, House of

Representatives

August 1997 DIRECT STUDENT

LOANS

Analyses of Borrowers’

Use of the Income

Contingent Repayment

Option

GAO/HEHS-97-155

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-277321 

August 21, 1997

The Honorable William F. Goodling

Chairman, Committee on Education

 and the Workforce

House of Representatives

Dear Mr. Chairman:

The William D. Ford Federal Direct Loan Program (FDLP), established by

the Student Loan Reform Act of 1993, contains a unique repayment option.

Called the income contingent repayment (ICR) plan, it ties the borrowers’

monthly payments to their income, family size, and student loan amount.

Under ICR, borrowers with low incomes or high debt loads can fit their

student loan payments into their budgets because the size of their

payments can expand or contract with their ability to pay.

Now, 3 years after FDLP began, a sizable number of borrowers have begun

repaying their loans. You asked us to develop information that would help

assess how borrowers have been using ICR. As agreed with your office, we

focused our review on the following:

• To what extent are borrowers using ICR compared with other repayment

plans available under FDLP?

• How do loan delinquencies and defaults under ICR compare with

delinquencies and defaults under other FDLP repayment plans?1

• How do borrowers’ loan payments under ICR compare with payments

under other FDLP repayment plans?

• How does the Department of Education, which administers the program,

verify the accuracy of income reported by borrowers using ICR?

We based our review on data supplied by the Department of Education as

of March 31, 1997. We analyzed the usage of ICR and compared it with the

usage of the three other repayment plans generally available to FDLP

borrowers—standard repayment (10 years, fixed monthly payment),

extended repayment (up to 30 years depending on amount borrowed, fixed

monthly payment), and graduated repayment (up to 30 years depending on

amount borrowed, with low initial monthly payments that increase

1

Borrowers are delinquent if they have not made a payment for 31 to 180 days and in default if they

have not made a payment for more than 180 days. However, loans in default for more than 270 days

were not part of the databases we analyzed. After 270 days, loan records are transferred from the

FDLP loan service center to the Department of Education’s Debt Collection Service (DCS) unit.

Page 1 GAO/HEHS-97-155 Direct Student Loan Repayment
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generally every 2 years). Appendix I describes our scope and methodology

in further detail.

Results in Brief As of March 31, 1997, about 663,000 borrowers owing about $5.3 billion in

FDLP loans were repaying loans. About 9 percent, or 56,298, of these

borrowers were using ICR. As a group, they differed from most borrowers

in two key respects. First, they were much more likely to have direct

consolidation loans, which are multiple loans combined into a single loan

for repayment purposes and are generally much larger than other loans.

Second, about 40 percent, or 23,678, of the 56,298 ICR users had been

placed into this plan because they were in default on loans from the

Federal Family Education Loan Program (FFELP). We found little

relationship between the type of school attended by FDLP nonconsolidated

loan borrowers and their selection of ICR as a repayment plan. However,

nonconsolidated loan borrowers from 2-year public schools were

somewhat more inclined to select the ICR plan than were borrowers from

other kinds of schools.

We found that about 80 percent (44,379 of 56,298) of borrowers using ICR

either were current in their monthly payments or had their payments

suspended because they were in school or for other reasons. However,

borrowers using ICR tended to be delinquent or in default at higher

percentages than borrowers using other repayment plans. More

specifically, about 16 percent, or 9,807, of the 56,298 borrowers using ICR

were delinquent (made no payment for 31 to 180 days), and another

5 percent, or 2,832, were in default (made no payment for 181 to 270 days).2

Borrowers using the other plans were delinquent at rates ranging from

9.1 percent (1,838 of 20,139 extended plan users) to 14.8 percent (77,923 of

527,351 standard plan users) and in default at percentages ranging from

0.8 percent to 1.4 percent (158 and 7,534, respectively). Borrowers who

have been placed into the ICR plan because they have defaulted on an FFELP

loan are a major factor in the higher percentage of defaults for ICR users; of

the 2,832 borrowers using ICR and in default, 2,083, or 73.6 percent, had

defaulted on an FFELP loan.

Comparing estimated total loan payments for ICR users and borrowers who

use the three other repayment plans is complicated. Compared with

2

This contributes to understating the percentage of loans in default because default loans in arrears for

more than 270 days are excluded. The percentage of FDLP loans in default discussed in this report is

different from the default rates the Department of Education computes. For computing school default

rates, the Department includes borrowers who have not made a payment for 270 days or more. This is

called the “cohort default rate” as explained in app. I.

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borrowers who use the standard repayment plan, ICR users and those using

extended and graduated plans generally face higher total payments.

Compared with borrowers who use the extended or graduated repayment

plans, ICR users face comparatively higher total payments if their incomes

are low but comparatively lower total payments if their incomes are high.

However, ICR borrowers (and their spouses) with family incomes that

remain low over a long period of time do not have to repay all their

principal and interest if the maximum payback period of 25 years expires

before the full amount is paid off. In contrast, ICR borrowers whose income

increases substantially during the repayment period would make

increasingly higher monthly payments, and this could result in repayment

of the loan in full by the end of the 25-year repayment period.

The Department of Education checks the reported income of borrowers

using ICR in one of two ways. For borrowers who are in their first year of

repayment or who may have recently lost their jobs, the Department relies

primarily on documentation submitted by the borrower, such as pay stubs,

dividend statements, or canceled checks. The Department does not verify

the accuracy of this documentation when it is submitted; rather, it relies

on a signed certification from the borrower that the information is

complete and accurate. For borrowers who have been out of school for a

year or more, the Department obtains income information directly from

the Internal Revenue Service (IRS). The Department does not verify the

accuracy of information borrowers provide IRS but relies on IRS’

verification process. However, during the transition from using borrower

documentation to using IRS information, the Department compares the

income amounts from the two sources for discrepancies. If there are

significant discrepancies or if borrowers do not cooperate in providing

correct income information, they are removed from the ICR plan and

placed into another repayment plan.

Background In fiscal year 1996, students and their families used federal student loan

programs to borrow approximately $30 billion to pay for postsecondary

education. FDLP is one of two main approaches the federal government has

taken to make loans available for college. Under this program, students or

their parents borrow money directly from the government through the

schools the students attend. The other major program, FFELP, provides

loans through private lenders, and the federal government guarantees

repayment if borrowers default. According to a Department official, FDLP

accounted for about 32.1 percent of student loan volume in fiscal year

1996.

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Most FDLP borrowers can select one of four repayment options, as

illustrated in figure 1.3

 These four options differ by the amount of time

allowed to repay loans and the flexibility of the payment schedule. The ICR

option is the most flexible. It allows borrowers to pay relatively small or

no monthly payments when their incomes are low and to pay more when

their incomes rise. For example, a married borrower with a loan balance

of $20,000 and an annual family income of $15,000 would initially pay

about $77 a month. If the borrower’s annual income were $45,000, the

initial monthly payment would be about $225.

3

Not all repayment options are available for each kind of FDLP loan. For example, the ICR plan is not

available for FDLP PLUS or PLUS consolidation loans, which are made to students’ parents.

Page 4 GAO/HEHS-97-155 Direct Student Loan Repayment
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Figure 1: Basic Characteristics of FDLP Repayment Options

Standard Repayment

Monthly payment: fixed amount

Minimum payment: $50

Repayment term: maximum of 10 years

Income Contingent Repayment

Monthly payment: variable amount based on initial debt, 

annual income, and family size

Minimum payment:

$0

if the minimum payment does not cover monthly interest, the 

unpaid interest is added to the principal balance for later 

repayment.

Repayment term:

maximum of 25 years

if the loan is not repaid after 25 years, the remaining balance 

is canceled (the unpaid amount is considered income for tax 

purposes)

Extended Repayment

Monthly payment: fixed amount

Minimum payment: $50

Repayment term: varies with loan 

size, as follows:

Less than $10,000: 12 years

$10,000-$19,999: 15 years

$20,000-$39,999: 20 years

$40,000-$59,999: 25 years

More than $60,000: 30 years

Graduated Repayment

Monthly payment: variable 

amount increasing about every 2 

years

Minimum payment: amount of 

monthly interest

Repayment term: same as 

extended repayment plan

Federal Direct Loan 

Program Repayment 

Plans

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For our analysis,we classified FDLP loans into three main categories.

• Direct nonconsolidated loans: These are the basic FDLP loans with which

students or their parents can help finance postsecondary education. There

are three kinds: subsidized and unsubsidized direct Stafford loans and

direct PLUS loans. Direct subsidized Stafford loans, available only to

students with a demonstrated financial need, are subsidized in that the

federal government does not charge interest while the student is in school

at least half-time, during a 6-month grace period after the student

graduates or otherwise leaves school, and during periods in which loan

repayment is deferred (such as when the borrower is seeking but unable

to find full-time employment). In contrast, direct unsubsidized Stafford

loans, which are available to all students regardless of financial need, do

not include an interest subsidy. If the borrower does not make interest

payments while in school, the interest is added to the principal balance to

be repaid as part of the total loan amount. Direct PLUS loans are available

to parents of dependent students to help pay for their children’s education;

they are unsubsidized because parents are responsible for paying all

interest charges.

• Direct consolidation loans: During the course of their education, students

can obtain loans from more than one program. By obtaining a direct

consolidation loan, borrowers can combine their loans and make only one

monthly payment. Borrowers can consolidate their loans while they are in

school or afterward, and the interest on their consolidation loans can be

subsidized or unsubsidized, depending on the kind of original loans they

consolidated. Borrowers in default on a student loan who have made

satisfactory arrangements to repay the defaulted loan, or who agree to

repay under the ICR plan, can also obtain direct consolidation loans.

Parents with multiple PLUS loans can combine them into a single direct

PLUS consolidation loan.

• Debt Collection Service (DCS) consolidation loans: These are direct

consolidation loans to borrowers who previously defaulted on their FFELP

loans and whose loans were assigned to the Department’s DCS for

collection. In fiscal year 1995, the Department began to increase

collections on defaulted FFELP loans by offering direct consolidation loans

to these borrowers so they could make more affordable payments through

the ICR plan.

As shown in table 1, the vast majority (83.6 percent) of FDLP borrowers in

repayment had nonconsolidated loans as of March 31, 1997. These

borrowers represented about 69 percent of the total direct loan volume in

repayment. However, borrowers with direct consolidation loans had

Page 6 GAO/HEHS-97-155 Direct Student Loan Repayment
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average loan amounts that were much higher than those of the two other

kinds of borrowers—$21,807 compared with $6,611 and $5,453. Such

borrowers had more than 26 percent of total loan volume, even though

they were only about 10 percent of all borrowers.

Table 1: FDLP Loans in Repayment, as of March 31, 1997

Borrower Original loan amount

Loan category Number

Percentage of

total

Millions of

dollars

Percentage of

total

Average

loan

amount

Direct nonconsolidated 554,461 83.6 $3,665.3 69.0 $6,611

Direct consolidation 64,430 9.7 1,405.0 26.4 21,807

DCS consolidation 44,407 6.7 242.1 4.6 5,453

Total 663,298 100.0 $5,312.5a 100.0

aNumbers do not add to total due to rounding.

ICR Used by About 9

Percent of FDLP

Borrowers

As of March 31, 1997, slightly more than 56,000 borrowers in repayment

were using ICR—about 9 percent of the total (see fig. 2). Collectively, these

borrowers accounted for about $831 million in outstanding loans, or about

16 percent of the $5.3 billion of FDLP loans in repayment. Borrowers using

the standard plan were the largest in number and loan volume among the

four plans. However, the average size of their loans (about $6,530) was

considerably smaller. By comparison, loans held by ICR users averaged

about $14,770.4

 Borrowers using the extended plan had the highest average

balance (about $17,000).

4

For details on the distribution of borrowers and loan amounts among the various repayment plans,

see app. II.

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Figure 2: Distribution of Borrowers and Loan Amounts for Each FDLP Repayment Option, as of March 31, 1997

0 100 200 300 400 500 600 0 0.5 1 1.5 2 2.5 3 3.5 4 0 5 10 15 20

Thousands of Borrowers Billions of Dollars Thousands of Dollars

Number of Persons With 

Loans in Repayment Status

Total Amount of 

Outstanding Loans

Average Loan Balance

Standard

Repayment

Income Contingent

Repayment

Graduated 

Repayment

Extended 

Repayment

Many ICR Users Had

Direct or DCS

Consolidation Loans

Borrowers using ICR differed from most other FDLP loan borrowers in

repayment in several important ways. More than half (51 percent) were

borrowers with direct consolidation loans (see fig. 3). In contrast, only

about 8.5 percent of all borrowers in FDLP had such loans. Borrowers with

direct consolidation loans held nearly 80 percent of total dollar volume of

loans being repaid under ICR. Another large portion (about 42 percent) of

borrowers using the ICR plan were those with DCS consolidation loans.

However, these borrowers had relatively small average loan amounts

($6,100 compared with $23,000 for direct consolidation loans) and held

only 17 percent of the total loan volume being repaid under ICR. Only about

7 percent of borrowers using ICR held nonconsolidated loans.

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Figure 3: Distribution of Borrowers and Amounts in Repayment Under ICR, as of March 31, 1997

28,888

3,732

23,678

$656.1

Million

$30.3

Million

$144.9

Million

Consolidated Loans

Nonconsolidated Loans

Debt Collection Service Loans

Number of Borrowers Using Income

Contingent Repayment Dollar Amount of Their Loans

Limited Data Suggest ICR

Users Not Concentrated in

Particular Types of Schools

Information on the kinds of schools that ICR users attended is limited to

borrowers who had nonconsolidated loans. According to a Department

official, the Department does not track repayment plan data by school for

direct and DCS consolidation loans. Because students whose previous

loans were combined into either a direct or DCS consolidation loan

sometimes have attended more than one school, classifying loans by kind

of school is difficult and not very meaningful.

Data on FDLP borrowers with nonconsolidated loans show little

relationship between the type of school attended and a borrower’s

selection of ICR as a repayment plan. For the most part, there was little

variation between the various repayment plans when compared by type of

school, such as public and private or 2-year and 4-year. The data did show

that borrowers from 2-year public schools were somewhat more inclined

to select the ICR plan than were borrowers from other kinds of schools.

However, since nonconsolidated loan recipients represented less than

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10 percent of ICR users, it is unclear whether they represented ICR users as

a whole.5

Delinquencies and

Defaults Under ICR

Are Higher Than

Under Other

Repayment Plans

Across all four types of repayment plans, 14.4 percent of FDLP borrowers

were delinquent and 1.7 percent were in default, according to the

Department data in our analysis. (See table 2.) About 70 percent of

borrowers were current on their loan payments, and another 13.7 percent

were currently not paying because their payments had been postponed

through statutorily provided deferment or forbearance procedures. The

data we analyzed generated an understated percentage of loans in default

because only defaulted loans in arrears for 181 to 270 days are included.

According to a Department official, loans in arrears for longer than 270

days had been transferred to the Department’s DCS and, therefore, data on

these loans were not contained in the database we used for our analysis.6

This official said that, as of March 31, 1997, about $34.6 million in such

defaulted loans had been transferred to DCS. Thus, when these defaulted

loans are combined with the $71 million in loans that were in default for

181 to 270 days, the total of defaulted direct loans is about $105.6 million.

Table 2: Status of FDLP Loans in Repayment, as of March 31, 1997

Borrower Original loan amount

Repayment status Explanation Number

Percentage of

total

Amount

(in millions)

Percentage of

total

Current Payment on time 466,339 70.3 $3,735.1 69.9

Default Payment not made for 181-270 days 11,026 1.7 71.0 1.3

Payment not made for over 270 days a a 34.6 0.6

Delinquent Payment not made for 31-180 days 95,328 14.4 660.4 12.4

Deferment and forbearance Payment postponed because

borrower is in school or for other

reasons 90,605 13.7 846.0 15.8

Total 663,298 100.0b $5,347.1 100.0

aNot available.

bPercentages do not add to 100 due to rounding.

5

For details on how nonconsolidated loan borrowers in FDLP were distributed by repayment option by

type of school, see app. III.

6

For information on the Department’s use of separate data systems, see Department of Education:

Multiple, Nonintegrated Systems Hamper Management of Student Financial Aid Programs

(GAO/T-HEHS/AIMD-97-132, May 15, 1997).

Page 10 GAO/HEHS-97-155 Direct Student Loan Repayment
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It is important to note that the percentage of FDLP loans in default we

computed in our analysis is different from the default rate the Department

computes. There are two major differences. First, our computation of

loans in default reflects only borrowers who have not made a payment for

181 to 270 days, but the Department’s default rates include borrowers who

have not made a payment for more than 270 days. Second, the percentage

of borrowers in default that we computed for FDLP is a simple percentage

(number of borrowers in default divided by the total number of borrowers

in repayment at a single point in time). In contrast, the Department’s

default rates are computed for a cohort of borrowers over a period of

time. (This is explained in app. I.)

Compared with the three other payment plans, the overall percentage of

loans that were delinquent or in default under ICR were higher (see fig. 4).

The delinquency rate among ICR users was 16.1 percent, and the

percentage of loans in default was 5.0. By comparison, the next highest

delinquency rate was 14.8 percent (for borrowers using standard

repayment), and the next highest percentage of loans in default was 1.4

(also for borrowers using standard repayment).

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Figure 4: Comparison of the

Percentage of FDLP Loans That Were

Delinquent and in Default for Each

Repayment Plan

0 5 10 15 20

Income Contingent 

Repayment

Standard 

Repayment

Extended 

Repayment

Graduated 

Repayment

Percentage of Repayers Who Are Delinquent 31-179 Days

0 5 10 15 20

Income Contingent 

Repayment

Standard 

Repayment

Extended 

Repayment

Graduated 

Repayment

Percentage of Repayers Who Are in Default 180-270 Days

There appear to be two possible explanations for why borrowers using ICR,

as a group, have overall higher delinquencies and defaults than borrowers

using the other repayment plans. First, a higher concentration of

borrowers with DCS consolidation loans uses the ICR plan than the other

repayment plans (53 percent, or 23,678, of 44,407 DCS consolidation loan

borrowers are using ICR), and, as we discuss below, borrowers of these

kinds of loans have the highest percentage of loans that are delinquent and

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in default. Second, the exclusion of PLUS loan borrowers, who according

to Department officials tend to have lower delinquency and default rates

than student borrowers, from the ICR plan could tend to make

delinquencies and defaults of the other plans lower relative to the rates of

the ICR plan.

Considerable Variances in

Delinquencies and Defaults

by Type of ICR Loan

Among borrowers using ICR, there is considerable variance in delinquency

rates, depending on the type of loan (see fig. 5). Of the three categories of

loans in repayment (nonconsolidated, direct consolidation, and DCS

consolidation), the highest delinquency rate was for borrowers with DCS

consolidation loans (about 19 percent). ICR users with direct consolidation

and nonconsolidated loans had significantly lower delinquency rates

(14.6 percent and 9.6 percent, respectively). Given that the majority

(53.3 percent) of borrowers with DCS consolidation loans are ICR users, the

overall higher delinquency rate for ICR compared with the other repayment

plans could be partly the result of considerably greater involvement of DCS

consolidation loan borrowers (borrowers who previously defaulted on

FFELP loans) in the ICR plan compared with the other repayment plans. (See

app. II.)

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Figure 5: Delinquency Rates of

Borrowers Using ICR, as of March 31,

1997

0 5 10 15 20

Nonconsolidated

Loans

Consolidated 

Loans

Debt Collection 

Service Loans

Percentage of ICR Repayers Who Are Delinquent

A comparison of individual types of loans shows that ICR users do not have

higher delinquency rates than users of all other repayment plans (see fig.

6). For example, for nonconsolidated loans alone, the delinquency rate

among ICR users was below that among users of the standard plan and

about the same as that among users of extended and graduated plans.

Even for DCS consolidation loans, ICR users had a lower delinquency rate

compared with those in the three other plans. However, with over half of

DCS consolidation loans under the ICR plan, the influence of these loans’

high delinquency rate is felt primarily by ICR.

7

7

For details on delinquency rates among ICR users and users of the other repayment plans, see app. IV.

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Figure 6: Comparison of Delinquency Rates Across Four Repayment Plans by Type of FDLP Loan

Nonconsolidated 

Loans

Consolidated 

Loans

Debt Collection 

Service Loans

0 5 10 15 20 25 30

Percentage of Repayers Who Are Delinquent

Standard

Repayment

Income Contingent

Repayment

Graduated 

Repayment

Extended 

Repayment

Page 15 GAO/HEHS-97-155 Direct Student Loan Repayment
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FDLP loan default patterns are similar to those for delinquencies. Among

borrowers using ICR, the percentage of loans in default is much higher for

DCS consolidation loans than for nonconsolidated or direct consolidated

loans (see fig. 7). ICR users who had DCS consolidation loans defaulted at a

rate of 8.8 percent, compared with rates of 0.9 percent and 2.5 percent for

ICR users with nonconsolidated and direct consolidation loans,

respectively. Again, given the concentration of borrowers with DCS

consolidation loans in the ICR plan, ICR’s overall high percentage of loans in

default is strongly affected by this one type of loan.

Figure 7: Percent of Borrowers Using

ICR That Were in Default 181 to 270

Days, as of March 31, 1997

0 2 4 6 8 10

Nonconsolidated

Loans

Consolidated 

Loans

Debt Collection 

Service Loans

Percentage of ICR Repayers 180-270 Days Late

As with delinquencies, a comparison of individual types of loans shows

that ICR users did not have higher percentages of loans in default across

the board than users of other repayment plans (see fig. 8). However, ICR

users did have the highest percentage of loans in default for two of the

three loan types.8

8

For details on defaults among ICR users and users of the other repayment plans, see app. V.

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Figure 8: Comparison of Percentage of Borrowers in Default 181 to 270 Days Across Four Repayment Plans by Type of

FDLP Loan

Nonconsolidated 

Loans

Consolidated 

Loans

Debt Collection 

Service Loans

0 2 4 6 8 10

Percentage of Repayers 180-270 Days Late 

Standard

Repayment

Income Contingent

Repayment

Graduated 

Repayment

Extended 

Repayment

Page 17 GAO/HEHS-97-155 Direct Student Loan Repayment
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Total Borrower

Payments Under ICR

Are Higher in Some

Circumstances, Lower

in Others

There is no single answer to whether a borrower will pay more or less

under ICR compared with standard, extended, or graduated plans.

Borrowers for whom ICR was primarily designed (that is, borrowers with a

limited ability to pay) could face relatively higher total payments in the

form of larger total interest costs and tax liability—on amounts they were

not able to repay within the 25-year loan repayment limit. In contrast, ICR

may be less costly than the extended or graduated plans for borrowers

with considerably greater ability to repay their loans.

To provide some indication of how the type of repayment plan affects a

borrower’s initial monthly payment amount and total loan payments, we

compared the four plans with two different starting incomes—$15,000 and

$45,000.9

Lower Income Scenario:

Starting Income of $15,000

This scenario assumes that (1) the borrower and spouse have an initial

annual combined income at the beginning of the repayment period of

$15,000 and receive annual income increases of 5 percent over the

repayment period, (2) the borrower is married throughout with no

children, and (3) the loan interest rate is 8.25 percent. Table 3 shows how

the size of a loan affects the initial monthly payment amounts under the

ICR plan compared with the other repayment plans.

Table 3: Comparison of Monthly

Payment Amounts Under ICR and

Other Repayment Options: Starting

Income of $15,000

Monthly payment amount

Original loan amount Standard Extended Graduateda ICR

$5,000 $61 $55 $35 $34

10,000 123 97 70 68

20,000 245 170 140 77

40,000 491 315 280 77

75,000 920 563 526 77

100,000 1,227 751 701 77

aInitial monthly payment amounts.

The initial monthly payments for a borrower using ICR are substantially

less than the initial monthly payments for the other repayment plans for

9

We selected these income amounts because data on monthly payments and total loan payments for

these income levels were readily available from the Department’s 1996 Repayment Book. The

Repayment Book contains plan descriptions and worksheets with formulas that borrowers can use to

estimate their monthly payment amounts under the various plans. It also shows examples of what the

monthly payment amounts and total payments would be under the various plans for different loan

amounts, including ICR for various hypothetical borrower income amounts.

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loans of $20,000 and higher. Although initial payment amounts under the

other plans increase for larger loan amounts, the payments under ICR

increase to a much lesser extent and stop increasing at loans above

$20,000. Under ICR, borrowers’ payment amounts are capped at 20 percent

of their discretionary income.10 Thus, a borrower with an income of

$15,000 and $100,000 in loans would pay no more per month under ICR

than a borrower with the same income and an initial loan amount of

$20,000.

The size of a borrower’s monthly payment has a direct effect on his or her

total loan payments. Those payments include the amounts to repay

principal and interest, and ICR users can also incur a cost for the potential

tax liability on the loan balance that remains unpaid after 25 years. Unpaid

loan balances are forgiven at the end of the 25-year period but must be

treated as taxable income.11 Whether the lower income borrower under ICR

actually pays more or less than borrowers using alternatives depends in

part on the amount borrowed (see table 4).

Table 4: Comparison of Repayment Amounts Under ICR and Other Repayment Options: Starting Income of $15,000

Total repayment amount by repayment plan

(principal and interest)

Original loan amount Standard Extended Graduated ICR

ICR borrower’s

unpaid balance

after 25 years

$5,000 $7,359 $7,893 $8,655 $12,016 $1,285

10,000 14,718 17,463 19,085 23,965 2,570

20,000 29,437 40,899 44,115 44,235 20,780

40,000 58,873 94,614 100,567 64,918 65,605

75,000 110,387 202,842 212,324 67,638 177,208

100,000 147,183 270,456 283,098 67,638 259,072

A borrower with an initial income of $15,000 and loans ranging from

$5,000 to $10,000 would pay more under ICR than under the other plans. In

contrast, a borrower with $40,000 or more in loans would repay far less

under ICR than under the extended and graduated alternatives because

under these two plans the borrower pays off the total loan; the borrower

using ICR would not. However, a borrower using ICR has to contend with

having to declare the unpaid balance of the loans as income—and possibly

10The Department defines discretionary income as the portion of adjusted gross income (AGI) that

remains after deducting an allowance for basic living costs as specified in the Department of Health

and Human Service’s Poverty Guidelines. In 1997, the allowance for a family of two in the 48

contiguous states and Washington, D.C., was $10,610.

11Legislation introduced in the 105th Congress, if enacted, would discharge a borrower’s unpaid

balance at the end of the repayment period, excluding it from tax.

Page 19 GAO/HEHS-97-155 Direct Student Loan Repayment
B-277321 

incur a tax liability. As loan amounts increase, the potential tax liability

rises substantially for borrowers at this income level.

Higher Income Scenario:

Starting Income of $45,000

This scenario makes the same assumptions as the first, except that

calculations are based on a starting income of $45,000. ICR does not

provide the same lower monthly payment advantages over the other plans

as it does for lower income borrowers. Initially, as table 5 illustrates, ICR

has consistently lower monthly payments than the standard plan but

higher monthly payments than the extended and graduated plans, except

for loans at the $100,000 level.

Table 5: Comparison of Monthly

Payment Amounts Under ICR and

Other Repayment Options: Starting

Income of $45,000

Monthly payment amount

Original loan amount Standard Extended Graduateda ICRa

$5,000 $61 $55 $35 $56

10,000 123 97 70 112

20,000 245 170 140 225

40,000 491 315 280 450

75,000 920 563 526 577

100,000 1,227 751 701 577

aInitial monthly payment amounts.

Table 6 compares total loan payments that a borrower and spouse with a

starting combined income of $45,000 would pay under each of the four

repayment plans for loan amounts ranging from $5,000 to $100,000. As it

shows, payments for principal and interest under ICR are always higher

than under standard repayment but always lower than under the extended

or graduated plans. Unlike the borrower who begins with a $15,000

income, the borrower with an initial income of $45,000 has no unpaid

balance after 25 years for any of the loan amounts illustrated.

Page 20 GAO/HEHS-97-155 Direct Student Loan Repayment
B-277321 

Table 6: Comparison of Repayment

Amounts Under ICR and Other

Repayment Options: Starting Income

of $45,000

Total repayment amount by repayment plan

(principal and interest) Original loan

amount Standard Extended Graduated ICR

ICR borrower’s

unpaid balance

after 25 years

$5,000 $7,359 $7,893 $8,655 $7,559 0

10,000 14,718 17,463 19,085 15,117 0

20,000 29,437 40,899 44,115 30,235 0

40,000 58,873 94,614 100,567 60,470 0

75,000 110,387 202,842 212,324 133,081 0

100,000 147,183 270,456 283,098 229,664 0

Measures Taken to

Obtain and Verify

Borrower Income

Information

Information on borrower income for computing monthly payment

amounts for the ICR plan is obtained from either documentation provided

by the borrower or information from IRS on the borrower’s AGI as reported

on his or her federal income tax return.

The monthly payment amount for borrowers in their first year of

repayment is based on documentation and other information submitted by

borrowers to the Department’s direct loan servicing center. This

documentation, referred to as “alternative documentation of income,” can

be recent pay stubs, dividend statements, canceled checks, or a statement

signed by the borrowers explaining their source of income.

According to a Department official, the Department uses alternative

documentation for borrowers in their first year of repayment because, in

most cases, AGI information from IRS is zero or close to zero. AGI reflects

prior-year income when borrowers were generally in school or not

working full time and were reporting little or no taxable income. However,

most borrowers have income, and the alternative documentation captures

it. This kind of documentation is also used in other situations when

borrowers’ AGI does not reflect their current income, such as when a

borrower becomes unemployed.

According to Department officials, service center personnel do not

conduct credit checks or contact employers to verify the accuracy of

borrowers’ information. However, when borrowers submit this

documentation, they also certify that they are providing accurate and

complete income information.

After ICR users have been out of school for at least 1 year, their monthly

payment amount is based on their AGI as reported on their federal income

Page 21 GAO/HEHS-97-155 Direct Student Loan Repayment
B-277321 

tax returns. To obtain this information, the service center sends computer

tapes containing borrower identification information to IRS, which matches

this information against its records. IRS then sends computer tapes

containing borrower AGI information directly to the service center. After

receiving the IRS tapes, service center personnel run edit checks for quality

assurance.

According to Department officials, the Department does not verify the

accuracy of the information the borrowers provide IRS on their tax returns.

Rather, it relies on the IRS’ own audits, edits, and verifications to make sure

borrowers’ AGI is accurate. However, other measures are taken in certain

circumstances to ensure the accuracy and reasonableness of borrowers’

income information. For example, if a borrower is required to provide

alternative documentation of income because his or her AGI would reflect

an in-school period, the servicer still obtains AGI information from IRS to

see how accurately borrower-reported information from the previous year

reflected IRS-reported information for that year.

According to Department officials, borrowers falsifying their income to

reduce their monthly payments lengthen the time required to pay off their

loans, which ultimately costs them more money. The officials also said

that borrowers who do not cooperate in providing accurate income

information are automatically removed from the ICR plan and placed into

the standard repayment plan.

Agency Comments The Department of Education reviewed a draft of this report and had no

written comments, although it provided technical suggestions that we

incorporated as appropriate.

Copies of this report are being sent to the Chairman of the Senate

Committee on Labor and Human Resources, the Secretary of Education,

appropriate congressional committees and Members, and others who are

interested.

Page 22 GAO/HEHS-97-155 Direct Student Loan Repayment
B-277321 

If you have any questions about this report, please call me or Joseph J.

Eglin, Jr., Assistant Director, at (202) 512-7014. Major contributors to this

report include Joan A. Denomme, Charles M. Novak, and Charles H.

Shervey.

Sincerely yours,

Carlotta C. Joyner

Director, Education and

 Employment Issues

Page 23 GAO/HEHS-97-155 Direct Student Loan Repayment
Contents

Letter 1

Appendix I 

Scope and

Methodology

28

Appendix II 

Data on FDLP Loans

in Repayment

30

Appendix III 

Kinds of Schools

Attended by

Nonconsolidated Loan

Borrowers

32

Appendix IV 

Delinquency Rates of

FDLP Borrowers

36

Appendix V 

Defaults of FDLP

Borrowers

37

Tables Table 1: FDLP Loans in Repayment, as of March 31, 1997 7

Table 2: Status of FDLP Loans in Repayment, as of March 31,

1997

10

Table 3: Comparison of Monthly Payment Amounts Under ICR

and Other Repayment Options: Starting Income of $15,000

18

Table 4: Comparison of Repayment Amounts Under ICR and

Other Repayment Options: Starting Income of $15,000

19

Table 5: Comparison of Monthly Payment Amounts Under ICR

and Other Repayment Options: Starting Income of $45,000

20

Table 6: Comparison of Repayment Amounts Under ICR and

Other Repayment Options: Starting Income of $45,000

21

Page 24 GAO/HEHS-97-155 Direct Student Loan Repayment
Contents

Table II.1: Repayment Plans Selected by Borrowers of All Kinds

of FDLP Loans, as of March 31, 1997

30

Table II.2: Repayment Plans Selected by Borrowers With

Nonconsolidated Loans, as of March 31, 1997

30

Table II.3: Repayment Plans Selected by Borrowers With Direct

Consolidation Loans, as of March 31, 1997

30

Table II.4: Repayment Plans Selected by Borrowers With DCS

Consolidation Loans, as of March 31, 1997

31

 Table III.1: Nonconsolidated Loan Borrowers in Repayment by

Payment Plan and Kind of School, as of March 31, 1997

32

Table III.2: Dollar Volume of Nonconsolidated Loans in

Repayment by Payment Plan and Kind of School, as of March 31,

1997

34

 Table IV.1: Delinquency Rates of Borrowers Repaying Under

ICR, as of March 31, 1997

36

Table IV.2: Delinquency Rates of Nonconsolidated Loan

Borrowers by Kind of Repayment Plan, as of March 31, 1997

36

Table IV.3: Delinquency Rates of Direct Consolidation Loan

Borrowers by Kind of Repayment Plan, as of March 31, 1997

36

Table IV.4: Delinquency Rates of DCS Consolidation Loan

Borrowers by Kind of Repayment Plan, as of March 31, 1997

36

 Table V.1: Percentage of Loans in Default for Borrowers

Repaying Under ICR, as of March 31, 1997

37

Table V.2: Percentage of Loans in Default for Direct

Nonconsolidated Loan Borrowers by Kind of Repayment Plan, as

of March 31, 1997

37

Table V.3: Percentage of Loans in Default for Direct

Consolidation Loan Borrowers by Kind of Repayment Plan, as of

March 31, 1997

37

Table V.4: Percentage of Loans in Default for DCS Consolidation

Loan Borrowers by Kind of Repayment Plan, as of March 31, 1997

37

Figures Figure 1: Basic Characteristics of FDLP Repayment Options 5

Figure 2: Distribution of Borrowers and Loan Amounts for Each

FDLP Repayment Option, as of March 31, 1997

8

Figure 3: Distribution of Borrowers and Amounts in Repayment

Under ICR, as of March 31, 1997

9

Figure 4: Comparison of the Percentage of FDLP Loans That

Were Delinquent and in Default for Each Repayment Plan

12

Figure 5: Delinquency Rates of Borrowers Using ICR, as of

March 31, 1997

14

Page 25 GAO/HEHS-97-155 Direct Student Loan Repayment
Contents

Figure 6: Comparison of Delinquency Rates Across Four

Repayment Plans by Type of FDLP Loan

15

Figure 7: Percent of Borrowers Using ICR That Were in Default

181 to 270 Days, as of March 31, 1997

16

Figure 8: Comparison of Percentage of Borrowers in Default 181

to 270 Days Across Four Repayment Plans by Type of FDLP Loan

17

Abbreviations

AGI adjusted gross income

DCS Debt Collection Service

FDLP William D. Ford Federal Direct Loan Program

FFELP Federal Family Education Loan Program

ICR income contingent repayment

IRS Internal Revenue Service

Page 26 GAO/HEHS-97-155 Direct Student Loan Repayment
Page 27 GAO/HEHS-97-155 Direct Student Loan Repayment
Appendix I 

Scope and Methodology

To determine the extent to which borrowers are using the income

contingent repayment (ICR) plan compared with other repayment plans, we

obtained and analyzed data from the Department of Education on Federal

Direct Loan Programs (FDLP) loans being repaid as of March 31, 1997. To

determine the extent to which borrowers at the various kinds of schools

used the different types of repayment plans, we obtained and analyzed

data on nonconsolidated loans. Data on consolidation and DCS

consolidation loans categorized by kind of school were not available. A

Department official said that such data are not captured in the Department

databases we used for our analysis.

To determine the extent to which loans being repaid under ICR and other

repayment plans were delinquent or in default, we computed simple

percentages that reflect the proportion of total borrowers or dollar

amounts of loans in repayment classified as delinquent or in default on

March 31, 1997.

The percentages we computed are not comparable to the annual cohort

default rates the Department computes in accordance with the Higher

Education Act of 1965, as amended, and its Default Reduction Initiative.

The cohort default rate is computed to determine whether to allow

schools to participate in federal student loan programs—schools with

cohort default rates above certain statutory thresholds can be dropped or

prevented from participating in these programs. In general, cohort default

rates reflect the percentage of a school’s borrowers who enter repayment

in one fiscal year and default by the end of the next fiscal year.

To compare borrowers’ total payments under ICR and other repayment

plans, we used information from selected hypothetical examples

contained in the Department’s 1996 Repayment Book. Data on unpaid loan

balances remaining at the end of the repayment period for loans being

repaid under the ICR plan—for the various hypothetical scenarios we

used—were not contained in the Repayment Book. Therefore, we asked

the Department to compute these figures, and we used them in our

analyses.

To determine the extent to which the Department or its FDLP service center

verifies the accuracy of borrowers’ income information, we reviewed

Department regulations and guidelines. We also interviewed Department

officials to obtain additional information on these procedures.

Page 28 GAO/HEHS-97-155 Direct Student Loan Repayment
Appendix I 

Scope and Methodology

Our work was conducted from February to June 1997 in accordance with

generally accepted government auditing standards.

Page 29 GAO/HEHS-97-155 Direct Student Loan Repayment
Appendix II 

Data on FDLP Loans in Repayment

Table II.1: Repayment Plans Selected by Borrowers of All Kinds of FDLP Loans, as of March 31, 1997

Borrower Original loan amount

Repayment plan Number

Percentage of

total

Amount

(in millions)

Percentage of

total

Average loan

amounts

Standard 527,351 79.5 $3,442.4 64.8 $6,528

Extended 20,139 3.0 342.4 6.4 17,000

Graduated 59,510 9.0 696.4 13.1 11,703

ICR 56,298 8.5 831.3 15.7 14,767

Total 663,298 100.0 $5,312.5 100.0 $8,009

Table II.2: Repayment Plans Selected by Borrowers With Nonconsolidated Loans, as of March 31, 1997

Borrower Original loan amount

Repayment plan Number

Percentage of

total

Amount

(in millions)

Percentage of

total

Average loan

amounts

Standard 496,222 89.5 $3,130.8 85.4 $6,309

Extended 11,859 2.1 120.6 3.3 10,172

Graduated 42,648 7.7 383.6 10.5 8,994

ICR 3,732 0.7 30.3 0.8 8,118

Total 554,461 100.0 $3,665.3 100.0 $6,611

Table II.3: Repayment Plans Selected by Borrowers With Direct Consolidation Loans, as of March 31, 1997

Borrower Original loan amount

Repayment plan Number

Percentage of

total

Amount

(in millions)

Percentage of

total

Average loan

amounts

Standard 16,538 25.7 $250.1 17.8 $15,122

Extended 7,005 10.9 212.9 15.2 30,388

Graduated 11,999 18.6 286.0 20.4 23,833

ICR 28,888 44.8 656.1 46.7 22,712

Total 64,430 100.0 $1,405.0 100.0 $21,807

Note: Numbers do not add to total due to rounding.

Page 30 GAO/HEHS-97-155 Direct Student Loan Repayment
Appendix II 

Data on FDLP Loans in Repayment

Table II.4: Repayment Plans Selected by Borrowers With DCS Consolidation Loans, as of March 31, 1997

Borrower Original loan amount

Repayment plan Number

Percentage of

total

Amount

(in millions)

Percentage of

total

Average loan

amounts

Standard 14,591 32.9 $61.5 25.4 $4,212

Extended 1,275 2.9 8.9 3.7 6,964

Graduated 4,863 11.0 26.9 11.1 5,526

ICR 23,678 53.3 144.9 59.9 6,121

Total 44,407 100.0 $242.1 100.0 $5,453

Note: Numbers do not add to total due to rounding.

Page 31 GAO/HEHS-97-155 Direct Student Loan Repayment
Appendix III 

Kinds of Schools Attended by

Nonconsolidated Loan Borrowers

Table III.1: Nonconsolidated Loan

Borrowers in Repayment by Payment

Plan and Kind of School, as of

March 31, 1997

Standard

Kind of school Number

Percentage of

school total

2-year private 6,418 92.36

2-year public 25,402 92.88

4-year private 93,756 86.91

4-year public 319,370 89.62

Proprietary 51,276 91.68

Total 496,222 89.50

Page 32 GAO/HEHS-97-155 Direct Student Loan Repayment
Appendix III 

Kinds of Schools Attended by

Nonconsolidated Loan Borrowers

Extended Graduated ICR Total

Number

Percentage of

school total Number

Percentage of

school total Number

Percentage of

school total Number

Percentage of

school total

126 1.81 374 5.38 31 0.45 6,949 100.00

274 1.00 1,396 5.10 276 1.01 27,348 100.00

3,425 3.17 9,897 9.17 797 0.74 107,875 100.00

7,244 2.03 27,485 7.71 2,261 0.63 356,360 100.00

790 1.41 3,496 6.25 367 0.66 55,929 100.00

11,859 2.14 42,648 7.69 3,732 0.67 554,461 100.00

Page 33 GAO/HEHS-97-155 Direct Student Loan Repayment
Appendix III 

Kinds of Schools Attended by

Nonconsolidated Loan Borrowers

Table III.2: Dollar Volume of

Nonconsolidated Loans in Repayment

by Payment Plan and Kind of School,

as of March 31, 1997

Standard

Dollars in millions

Kind of school

Loan

volume

Percentage of

school total

2-year private $28.4 88.92

2-year public 81.3 91.38

4-year private 734.6 81.60

4-year public 2,059.4 86.23

Proprietary 227.2 88.74

Total $3,130.8 85.42

Page 34 GAO/HEHS-97-155 Direct Student Loan Repayment
Appendix III 

Kinds of Schools Attended by

Nonconsolidated Loan Borrowers

Extended Graduated ICR Total

Loan

volume

Percentage of

school total

Loan

volume

Percentage of

school total

Loan

volume

Percentage of

school total

Loan

volume

Percentage of

school total

$1.0 3.03 $2.5 7.73 $0.1 0.32 $31.9 100.00

1.2 1.34 5.5 6.24 .9 1.04 89.0 100.00

44.1 4.89 111.8 12.43 9.7 1.08 900.2 100.00

69.2 2.90 241.9 10.13 17.8 0.75 2,388.3 100.00

5.2 2.04 21.8 8.51 1.8 0.70 256.0 100.00

$120.6 3.29 $383.6 10.47 $30.3 0.83 $3,665.3 100.00

Note: Numbers do not add to total due to rounding.

Page 35 GAO/HEHS-97-155 Direct Student Loan Repayment
Appendix IV 

Delinquency Rates of FDLP Borrowers

Table IV.1: Delinquency Rates of

Borrowers Repaying Under ICR, as of

March 31, 1997

Borrower

Loan category Delinquent Total

Percentage

delinquent

Direct nonconsolidated 358 3,732 9.6

Direct consolidation 4,230 28,888 14.6

DCS consolidation 4,499 23,678 19.0

Total 9,087 56,298 16.1

Table IV.2: Delinquency Rates of

Nonconsolidated Loan Borrowers by

Kind of Repayment Plan, as of

March 31, 1997

Borrower

Repayment plan Delinquent Total

Percentage

delinquent

Standard 72,424 496,222 14.6

Extended 984 11,859 8.3

Graduated 4,096 42,648 9.6

ICR 358 3,732 9.6

Total 77,862 554,461 14.0

Table IV.3: Delinquency Rates of Direct

Consolidation Loan Borrowers by Kind

of Repayment Plan, as of March 31,

1997

Borrower

Repayment plan Delinquent Total

Percentage

delinquent

Standard 1,707 16,538 10.3

Extended 558 7,005 8.0

Graduated 1,316 11,999 11.0

ICR 4,230 28,888 14.6

Total 7,811 64,430 12.1

Table IV.4: Delinquency Rates of DCS

Consolidation Loan Borrowers by Kind

of Repayment Plan, as of March 31,

1997

Borrower

Repayment plan Delinquent Total

Percentage

delinquent

Standard 3,792 14,591 26.0

Extended 296 1,275 23.2

Graduated 1,068 4,863 22.0

ICR 4,499 23,678 19.0

Total 9,655 44,407 21.7

Page 36 GAO/HEHS-97-155 Direct Student Loan Repayment
Appendix V 

Defaults of FDLP Borrowers

Table V.1: Percentage of Loans in

Default for Borrowers Repaying Under

ICR, as of March 31, 1997

Borrower

Loan category In default Total

Percentage in

default

Direct nonconsolidated 34 3,732 0.9

Direct consolidation 715 28,888 2.5

DCS consolidation 2,083 23,678 8.8

Total 2,832 56,298 5.0

Table V.2: Percentage of Loans in

Default for Direct Nonconsolidated

Loan Borrowers by Kind of Repayment

Plan, as of March 31, 1997

Borrower

Repayment plan In default Total

Percentage in

dafault

Standard 6,823 496,222 1.4

Extended 51 11,859 0.4

Graduated 233 42,648 0.6

ICR 4 3,732 0.9

Total 7,141 554,461 1.3

Table V.3: Percentage of Loans in

Default for Direct Consolidation Loan

Borrowers by Kind of Repayment Plan,

as of March 31, 1997

Borrower

Repayment plan In default Total

Percentage in

dafault

Standard 216 16,538 1.3

Extended 54 7,005 0.8

Graduated 123 11,999 1.0

ICR 715 28,888 2.5

Total 1,108 64,430 1.7

Table V.4: Percentage of Loans in

Default for DCS Consolidation Loan

Borrowers by Kind of Repayment Plan,

as of March 31, 1997

Borrower

Repayment plan In default Total

Percentage in

dafault

Standard 495 14,591 3.4

Extended 53 1,275 4.2

Graduated 146 4,863 3.0

ICR 2,083 23,678 8.8

Total 2,777 44,407 6.3

(104878) Page 37 GAO/HEHS-97-155 Direct Student Loan Repayment
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