Federal Student Loans: Education Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options
Published: 2015-08-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As of September 2014, outstanding federal student loan debt exceeded $1 trillion, and about 14 percent of borrowers had defaulted on their loans within 3 years of entering repayment, according to Education data. GAO was asked to review options intended to help borrowers repay their loans.
For Direct Loan borrowers GAO examined: (1) how participation in Income-Based Repayment and Pay As You Earn compares to eligibility, and to what extent Education has taken steps to increase awareness of these plans, and (2) what is known about Public Service Loan Forgiveness certification and eligibility, and to what extent Education has taken steps to increase awareness of this program. GAO reviewed relevant federal laws, regulations, and guidance; September 2014 data from Education and its loan servicer for Public Service Loan Forgiveness; Treasury's eligibility estimates; and 2012 employment data (most recent available) from the Bureau of Labor Statistics. GAO also interviewed officials from three loan servicers that service about half of Education's loan recipients.
section_title: What GAO Found
paragraphs: Many eligible borrowers do not participate in the Department of Education's (Education) Income-Based Repayment and Pay As You Earn repayment plans for Direct Loans, and Education has not provided information about the plans to all borrowers in repayment. These plans provide eligible borrowers with lower payments based on income and set timelines for forgiveness of any remaining loan balances. While the Department of the Treasury estimated that 51 percent of Direct Loan borrowers were eligible for Income-Based Repayment as of September 2012, the most recent available estimate, Education data show 13 percent were participating as of September 2014. An additional 2 percent were in Pay As You Earn. Moreover, Education has reported ongoing concerns regarding borrowers' awareness of these plans. Although Education has a strategic goal to provide superior information and service to borrowers, the agency has not consistently notified borrowers who have entered repayment about the plans. As a result, borrowers who could benefit from the plans may miss the chance to lower their payments and reduce the risk of defaulting on their loans.
Few borrowers who may be employed in public service have had their employment and loans certified for the Public Service Loan Forgiveness program, and Education has not assessed its efforts to increase borrower awareness. Beginning in 2017, the program is to forgive remaining Direct Loan balances of eligible borrowers employed in public service for at least 10 years. As of September 2014, Education's loan servicer for the program had certified employment and loans for fewer than 150,000 borrowers; however, borrowers may wait until 2017 to request certification. While the number of borrowers eligible for the program is unknown, if borrowers are employed in public service at a rate comparable to the U.S. workforce, about 4 million may be employed in public service. It is unclear whether borrowers who may be eligible for the program are aware of it. Although Education has a strategic goal to provide superior information and service to borrowers and provides information about Public Service Loan Forgiveness through its website and other means, it has not notified all borrowers in repayment about the program. In addition, Education has not examined borrower awareness of the program to determine how well its efforts are working. Borrowers who have not been notified about Public Service Loan Forgiveness may not benefit from the program when it becomes available in 2017, potentially forgoing thousands of dollars in loan forgiveness.
section_title: What GAO Recommends
paragraphs: GAO recommends Education consistently notify borrowers in repayment about income-driven repayment, and examine borrower awareness of Public Service Loan Forgiveness. Education generally agreed with GAO's recommendations, but it believed the report overstated the extent to which borrowers lack awareness of income-driven repayment. GAO modified the report to clarify this issue.

section_title: Letter
paragraphs: To help students and their families pay for higher education, the  Department of Education (Education) provides billions of dollars in federal  student loans each year through programs authorized under Title IV of  the Higher Education Act of 1965, as amended (HEA). However, as of  September 2014, about one in seven student loan borrowers (14 percent)  had defaulted on their loans within 3 years of beginning repayment, and  approximately $103 billion of more than $1 trillion in student loan debt  was in default according to data from Education. In recent years,  Education has implemented several programs to help borrowers under  the William D. Ford Federal Direct Loan (Direct Loan) program repay  federal student loans. The Income-Based Repayment (IBR) and Pay As  You Earn (PAYE) repayment plans set borrowers’ monthly payments  based on income and establish timelines after which remaining loan  balances are forgiven. In addition, beginning in 2017, the Public Service  Loan Forgiveness (PSLF) program is to forgive remaining student loan  balances of certain borrowers employed in public service, and borrowers  may request that Education certify their employment and loans in  advance for eligibility purposes. Although such options may help  borrowers manage their payments and receive loan forgiveness,  Education and others have noted that many eligible borrowers have not  participated. You asked us to review the IBR, PAYE, and PSLF programs.
This report examines the following questions for the Direct Loan program:  (1) How does borrower participation in Income-Based Repayment and  Pay As You Earn compare to available estimates of eligibility, and to what  extent has Education taken steps to increase borrower awareness of  these plans? (2) What is known about Public Service Loan Forgiveness  certification and eligibility, and to what extent has Education taken steps  to increase awareness of this program?
We used a variety of approaches and data sources in conducting this  work. To examine participation and key characteristics of borrowers in  IBR, PAYE, and other repayment plans and to examine PSLF we:  reviewed summary data from Education’s National Student Loan Data  System (NSLDS) on 19.3 million Direct Loan borrowers who had  entered repayment and had an outstanding loan balance as of  September 2014;  reviewed available estimates of IBR eligibility from a Department of  the Treasury (Treasury) analysis of Education and tax return data for  a random sample of borrowers; analyzed data from the loan servicer that administers PSLF for  Education, on borrowers who voluntarily requested and obtained  certification of their public service employment and loans as of  September 2014; used 2012 data, the most recent available, from the Department of  Labor’s Bureau of Labor Statistics on public service employment to  approximate the percentage of Direct Loan borrowers who may be  eligible for PSLF; and  reviewed and applied assumptions from a repayment calculator on  Education’s website to examine the potential effects of IBR, PAYE,  and PSLF for borrowers with various characteristics.
We determined that data from each of these sources were sufficiently  reliable for the purposes of this report by reviewing existing information  about the data and the systems that produced them, and by interviewing  knowledgeable agency officials.
To understand program terms and eligibility requirements, we reviewed  relevant federal laws and regulations, and documentation from Education,  such as program fact sheets. To determine the extent to which Education  has taken steps to raise awareness of the programs, we interviewed  Education officials and reviewed documentation of its efforts, including  information Education makes available to borrowers. We compared  information on Education’s efforts to criteria outlined in contract  requirements applicable to Education’s 11 Direct Loan servicers related to  communication with borrowers and the goals and objectives in the Office  of Federal Student Aid’s Fiscal Year 2012-2016 Strategic Plan. We  interviewed representatives of higher education associations, borrower  advocacy groups, and researchers about student loan repayment and  forgiveness, including factors that may affect borrowers’ decisions about  repayment. We also interviewed representatives of, and reviewed  documentation for, 3 of Education’s 11 loan servicers, which serviced  about half of all recipients of loans owned by Education. In addition,  during April and May 2015, we interviewed a nongeneralizable sample of  14 randomly selected borrowers about their awareness of income-driven  repayment plans. We did not review costs to the government or proposals  to revise existing repayment and forgiveness plans, as these topics were  beyond the scope of our review. See appendix I for more detail on our  scope and methodology.
We conducted this performance audit from November 2013 to August  2015 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Federal Student Loans
paragraphs: Under the Direct Loan program, Education issues several types of  student loans. They are Subsidized and Unsubsidized Stafford Loans,  PLUS Loans, and Consolidation Loans. The federal government sets  limits on the maximum interest rate, loan origination fee and other  charges, and annual and aggregate amounts that can be borrowed (see  table 1).
Education contracts with 11 loan servicers to manage Direct Loan  accounts. Loan servicing includes activities such as communicating with  borrowers, counseling borrowers on selecting repayment plans, and  processing payments.
section_title: Loan Repayment Plans
paragraphs: Education offers a variety of repayment plans for Direct Loan borrowers:
Standard: Borrowers have fixed monthly payments with a fixed term of  10 years or less (or 10 to 30 years for Consolidation Loans,  depending on the amount of the loan). Borrowers are automatically  enrolled in 10-year Standard repayment if they do not choose another  option.
Graduated: Borrowers have a fixed term of up to 10 years (or 10 to 30  years for Consolidation Loans, depending on the amount of the loan).  Monthly payments gradually increase.
Extended: Borrowers have a fixed term of 25 years or less. Monthly  payments may be fixed or graduated, and borrowers must have more  than $30,000 in loans.
Education also offers repayment plans that base monthly payments on  income and family size for Direct Loan borrowers who meet certain  eligibility requirements. They are: Income-Contingent Repayment (ICR);  Income-Based Repayment (IBR); and Pay As You Earn (PAYE). Key  features of these income-driven repayment plans include lower monthly  payments, repayment periods of up to 25 years, and forgiveness of any  remaining loan balances at the end of the repayment period. (See table  2.) The plans have provided progressively more generous repayment and  forgiveness terms to help borrowers manage their federal student loan  debt, and additional changes are expected. Specifically, Education issued  proposed regulations on July 9, 2015, that would expand PAYE to Direct  Loan borrowers regardless of when the borrower took out the loans.  Education officials said they intend to complete rulemaking on the  Revised Pay As You Earn plan by the end of 2015. The President and  congressional leaders have also proposed streamlining these plans.
As part of the application to participate in one of the income-driven  repayment plans, borrowers must provide documentation of their adjusted  gross income and certify their family size to their loan servicer, which  determines eligibility on behalf of Education. Income-driven repayment  plan participants must re-certify their adjusted gross income and family  size annually, which may increase or decrease their monthly payments. In  order to initially qualify for IBR and PAYE, borrowers must have income  and student loan debt such that their monthly payment would be less  under one of these plans than under the 10-year Standard repayment  plan. These borrowers are described as having a “partial financial  hardship.” Once enrolled, borrowers can remain on the plans and be  eligible for loan forgiveness regardless of whether they have a partial  financial hardship. However, the monthly payment for borrowers found to  no longer have a partial financial hardship is based on (and never  exceeds) the payment they would have owed under 10-year Standard  repayment. Because of the number of payments required before loan  forgiveness can be considered, Education officials said the earliest  possible date that any borrower may receive loan forgiveness under ICR  and the original IBR plan is July 1, 2019; PAYE is October 1, 2027; and  IBR for new borrowers is July 1, 2034.
Although loan forgiveness is a key feature of income-driven repayment  plans, under current tax law any amount forgiven under these plans is  subject to federal income tax. In addition, some borrowers will fully repay  their loans before qualifying for forgiveness. Extending the repayment  period may also result in some borrowers paying more interest over the  life of the loan than they would under 10-year Standard repayment.
section_title: Public Service Loan Forgiveness
paragraphs: Beginning in 2017, the Public Service Loan Forgiveness (PSLF) program  is to offer loan forgiveness on the remaining Direct Loan balances of  borrowers who complete at least 10 years of qualifying public service  employment and meet other requirements. The program was established  in 2007. To receive forgiveness, borrowers must make 120 on-time,  scheduled, monthly payments while employed full-time by a qualified  public service organization, such as a government or nonprofit  organization. Borrowers must also be working for a public service  organization at the time they apply for forgiveness and when the  remaining balance on their loan is forgiven. Because only payments  made after October 1, 2007 qualify, no borrowers are eligible to receive  loan forgiveness before October 2017. Qualifying repayment plans  include IBR, PAYE, ICR, 10-year Standard repayment, or another plan if  the payments equal or exceed the 10-year Standard payment amount.  However, borrowers enrolled in IBR, PAYE, and ICR are more likely to  have balances remaining to be forgiven after 120 payments, because the  10-year Standard repayment plan is set to fully pay all loan principal and  interest in 10 years or less. The amount of loans that may be forgiven is  not capped.
In January 2012, Education established a process to certify borrowers’  public service employment and loans for PSLF (see fig. 1). Education’s  loan servicer responsible for PSLF communicates with borrowers who  request certification about their employment, repayment plan, and  qualifying payments, including counseling borrowers about any changes  needed in order to qualify for the program. Borrowers may submit  information about their employment at any time or wait until they apply for  loan forgiveness beginning in October 2017.
section_title: Many Eligible Borrowers Do Not Participate in IBR and PAYE, and Education Is Missing Opportunities to Increase Awareness of These Plans
subsections: section_title: Many Eligible Borrowers Do Not Participate in IBR and PAYE
subsections: section_title: Eligibility and Participation
paragraphs: Many eligible borrowers do not participate in income-driven repayment  plans. Using its income tax data and Education’s student loan data,  Treasury estimated that about half (51 percent) of Direct Loan borrowers  were eligible for IBR as of September 2012. Of these eligible borrowers,  an estimated 20 percent participated in IBR or ICR, the only income- driven repayment plans available at the time of Treasury’s analysis.
According to our review of more recent summary data from Education’s  National Student Loan Data System, 15 percent of about 11.2 million  Direct Loan borrowers in active repayment—not in deferment,  forbearance, or default—participated in IBR (13 percent) or PAYE (2  percent) as of September 2014. An additional 4 percent of these  borrowers participated in ICR (see fig. 2). Participation in these three  income-driven repayment plans ranged from 15 percent of borrowers who  entered repayment in fiscal year 2009 or earlier to 23 percent of those  who entered repayment in fiscal year 2013.
While we examined participation in IBR and PAYE as of September 2014,  publicly available data from Education show participation in these plans  has increased over time. According to Education’s data, from June 2013  to March 2015, IBR participation among Direct Loan recipients increased  from 5.8 percent to 11.7 percent, and PAYE participation increased from  0.3 percent to 2.7 percent. These percentages differ from the ones we  present based on summary data from Education’s NSLDS due to different  borrower populations and time periods for analysis.
While data on retention in IBR and PAYE are limited given the newness  of the repayment plans, we found short-term retention rates were high,  according to our review of summary data from NSLDS:  IBR: 95 percent of Direct Loan borrowers participating in IBR with a  partial financial hardship in July 2012 remained in the plan 2 years  later (84 percent still had a partial financial hardship and paid less  than the 10-year Standard repayment amount).
PAYE: 98 percent of borrowers participating in PAYE with a partial  financial hardship in July 2013 remained in the plan or were in IBR 1  year later (86 percent still had a partial financial hardship and paid  less than the 10-year Standard repayment amount).
section_title: Factors That May Affect Participation
paragraphs: Education officials and higher education experts we interviewed said  many factors may affect eligible borrowers’ participation in income-driven  repayment plans. They said some may not be aware of IBR or PAYE,  may not understand them, or may have difficulty applying or meeting  annual income certification requirements. Education officials also noted  that some borrowers may choose non-standard repayment plans, such as  the Extended or Graduated plans, which may offer lower initial monthly  payments than income-driven plans. In addition, not all borrowers who  are aware of IBR or PAYE and are eligible choose to participate after  considering the costs and benefits. For some borrowers, the value of  lower monthly payments on IBR or PAYE may outweigh the potential  increase in total loan costs, while others may prefer to pay off their loans  sooner at a potentially lower total loan cost if they can afford higher  monthly payments on the 10-year Standard repayment plan.
To understand the potential costs and benefits of participating in IBR or  PAYE, we created two example borrowers—Borrower A and Borrower  B—who are single with $20,000 in loan debt and different starting annual  adjusted gross incomes that increase by five percent annually (see fig.  3).
For Borrower A, who begins repayment with an annual adjusted gross  income of $15,000, repaying with IBR or PAYE rather than the 10- year Standard plan would reduce both monthly payments and total  loan costs. Under PAYE in particular, Borrower A would pay less over  the life of the loan than the amount borrowed. Moreover, in this  example, the federal government would collect less on the loan than it  would on the 10-year Standard plan.  In contrast, for Borrower B, who begins repayment with a higher  annual adjusted gross income of $25,000, repaying with IBR or PAYE  would initially reduce monthly payments, but the total cost of the loans  would be higher than on the 10-year Standard plan. Compared to  Borrower A, Borrower B has higher total loan costs under both IBR  and PAYE due to paying more each month based on the higher  income. As a result, in this example, the federal government would  collect more on the loan from Borrower B than it would on the 10-year  Standard plan.
section_title: Characteristics of Participating Borrowers
paragraphs: Many income-driven repayment plan participants had low annual adjusted  gross incomes. For those with available income data, 70 percent of IBR  participants and 83 percent of PAYE participants earned from $1 to  $20,000, according to our review of September 2014 data from Education  (see fig. 4). In contrast, 10 percent of IBR participants and 5 percent of  PAYE participants had annual adjusted gross incomes greater than  $40,000.
We also found that IBR and PAYE participants had borrowed more than  those participating in Standard repayment. For example, 64 percent of  IBR participants and 45 percent of PAYE participants had borrowed more  than $30,000, compared to 23 percent of borrowers participating in  Standard repayment, according to September 2014 summary data from  Education (see fig. 5).
In addition, substantially lower percentages of IBR and PAYE participants  had defaulted on their loan compared to those in Standard repayment,  and the great majority were in active repayment as of September 2014.  Education officials cautioned against comparing default rates across  repayment plans because IBR and PAYE are newer and borrowers have  not had as much time to default. However, when we examined the status  of loans by cohort for borrowers who entered repayment in the same  fiscal year, we found IBR and PAYE participants had substantially lower  default rates than Standard plan participants. Specifically, among  borrowers who entered repayment from fiscal year 2010 to fiscal year  2014, less than 1 percent of IBR and PAYE participants had defaulted on  their loan, compared to 14 percent in Standard repayment (see fig. 6).  According to Education officials, fundamental differences between  borrowers who elect to participate in IBR and PAYE and Standard plan  participants may account for the difference in default rates. They also  noted that IBR and PAYE participants may have scheduled monthly  payments as low as zero dollars. For more information about how IBR  and PAYE participants compare to Standard plan borrowers on  characteristics such as gender, age, highest academic level, and type of  school attended, see appendix II.
section_title: Education Has Not Consistently Provided Information on Income- Driven Repayment Plans to Borrowers
paragraphs: Education has taken steps intended to increase borrower awareness of  income-driven repayment plans, including IBR and PAYE, but has not  consistently provided information about these plans to borrowers who  have entered repayment. According to Education’s Fiscal Year 2012- 2016 Strategic Plan for federal student aid, in support of its goal to  provide superior information and service to borrowers, Education aims to  compile and distribute information on the costs and benefits of higher  education programs to improve financial literacy and support borrowers’  decision-making. Education reported in its fiscal year 2015 budget  proposal that many borrowers seemed unaware of income-based or other  repayment options. Further, in February 2015, Education officials  highlighted ongoing concerns about awareness, noting that feedback they  have obtained from borrowers suggests borrowers are less aware of  income-driven repayment plans and many borrowers have not considered  these plans because they did not have enough information about them. In  addition, although 12 of the 14 borrowers we interviewed were aware of  income-driven repayment plans, 9 said they had to do their own research  to find information about them or did not have a good understanding of  the plans.
Education provides detailed information about income-driven repayment  on its website, including repayment terms; eligibility requirements; a  calculator that allows borrowers to estimate monthly loan payments and  total loan costs under different repayment plans; and an online counseling  tool that includes repayment options. Education also has begun  publicizing IBR and PAYE through social media. However, borrowers  must actively seek information through these sources. Education also  provides information about repayment plans—including IBR and PAYE  terms, benefits, and eligibility requirements—in the borrower rights and  responsibilities statement that is provided when borrowers receive their  loans and through required entrance and exit counseling completed by  borrowers when they begin and end school. However, Education does not  directly provide this information to borrowers once they have entered  repayment, when they may have a better sense of whether they can  afford their monthly payments.
In an effort to increase awareness of IBR and PAYE, Education  conducted outreach campaigns from fall 2013 through May 2015, in  which it sent emails to almost 5 million borrowers in targeted groups, such  as delinquent borrowers and borrowers in their grace period who had  more than $25,000 in debt. The emails provided general information  about income-driven repayment terms and benefits and directed  borrowers to Education’s website for more information. Education officials  said the department emailed these borrowers directly instead of having  loan servicers do so because customer feedback has shown borrowers  are not always familiar with their servicer. Education officials told us in  June 2015 that they plan to email in-grace borrowers with over $25,000 in  loan debt twice per year. In addition, Education has partnered with  Treasury since 2014 to include a message about income-driven  repayment options on the back of tax refund envelopes, and with Intuit  Inc. to include information about these options for borrowers who used  TurboTax to file their taxes. Education officials told us that, based on the  success of these efforts, they are continuing their partnership with Intuit  Inc. and that they formed a new partnership with H&R Block and Treasury  to publicize income-driven repayment options.
Once borrowers enter repayment, Education primarily relies on its loan  servicers to communicate directly with them about repayment options.  Although Education requires loan servicers to send certain  communications to borrowers who already participate in income-driven  repayment plans, it has not established specific requirements for how  servicers communicate with other borrowers about the plans. Instead,  Education officials said the department provides financial incentives to  servicers to help keep borrowers current in repayment (e.g. not in  delinquency, default, or forbearance). Representatives from the three  selected loan servicers we interviewed, which collectively serve about half  of borrowers with loans owned by Education, said they generally make  information about income-driven repayment available through customer  service representatives and websites. However, borrowers must actively  seek information through these sources. Documentation from these three  servicers also showed that they contacted some borrowers with  information about repayment options, including IBR and PAYE, when  borrowers missed monthly payments or their deferment or forbearance  periods were ending. However, when we reviewed sample written  communications the three loan servicers sent to all borrowers in  repayment in 2014, we found inconsistency in the information they  provided about income-driven repayment plans. In addition, these  communications did not include information about how the plans work or  their eligibility requirements. For example:
Two servicers included a list of repayment plans, including IBR and  PAYE, on the back of monthly billing statements sent to borrowers but  did not describe the plans or their benefits.
Another servicer, which serves more than 5 million borrowers, sent  billing statements mentioning the availability of repayment plans that  may help borrowers who are having difficulty making payments. The  statements indicated these plans could reduce monthly payments and  are based on income, but did not identify specific repayment plans.
The inconsistency and gaps we identified in how Education and its loan  servicers communicate with borrowers about income-driven repayment  raise questions about the sufficiency of this information. Without such  information, borrowers who are unaware of these plans may miss the  opportunity to reduce their risk of delinquency or default.
section_title: Few Borrowers Who May Be Employed in Public Service Have Had Their Employment and Loans Certified for PSLF, and Education Has Not Assessed Its Efforts to Increase Awareness about PSLF
subsections: section_title: About 147,000 Borrowers Had Employment and Loans Certified in Anticipation of PSLF, and 4 Million Borrowers May Be Employed in Public Service
subsections: section_title: Certification of Employment and Loans
paragraphs: While information on PSLF participation will not be available until  borrowers can begin applying for loan forgiveness in October 2017, about  147,000 borrowers have had their employment and loans certified for  PSLF as of September 2014, according to data from Education’s loan  servicer for the program. Although borrowers may wait until 2017 before  requesting certification, those who participate in the voluntary process in  advance learn whether they currently meet the basic eligibility  requirements and the number of qualifying loan payments they have  made. The number of borrowers who had employment and loans  certified for PSLF increased steadily from January 2012, when Education  established the voluntary process, through September 2014 (see fig. 7).  For more information on approvals and rejections of PSLF employment  certification forms, see appendix III.
The exact number of borrowers eligible for and planning to apply for  PSLF forgiveness when it becomes available beginning in 2017 is not  known. Only borrowers who complete Education’s voluntary process  provide their employment information to Education, and we identified no  additional data source on both federal student loans and public service  employment that would allow us to identify borrowers who may be eligible  for PSLF. However, according to 2012 annual employment data from the  Bureau of Labor Statistics, an estimated 24.7 percent of U.S. workers  nationwide (32.5 million of 131.7 million) were employed in public service,  considering federal, state, and local government agencies and 501(c)(3)  nonprofit organizations. If rates of public service employment are  comparable among Direct Loan borrowers, about 4 million current Direct  Loan borrowers may be employed in public service. Furthermore, if  rates of public service employment are comparable among Direct Loan  borrowers across repayment plans, about 643,000 Direct Loan borrowers  repaying their loans through IBR, PAYE, and ICR as of September 2014  may be employed in public service. As previously discussed, these  repayment plans are more likely to leave borrowers with an outstanding  balance after 120 payments and enable them to benefit from PSLF after it  becomes available in 2017.
section_title: Key Characteristics of Borrowers Who Had Employment and Loans Certified
paragraphs: Most of the borrowers who had their employment and loans certified for  PSLF were enrolled in an income-driven repayment plan, had annual  adjusted gross incomes exceeding $20,000, and had borrowed more than  $30,000. As of September 2014, 71 percent (104,422 of 146,866) of  borrowers who had their employment and loans certified for PSLF were  enrolled in IBR, PAYE, or ICR (see fig. 8). Borrowers on these income- driven plans for longer periods of time are more likely to have remaining  loan balances to be forgiven after making the required 120 payments, in  contrast to those on other qualifying plans, such as 10-year Standard  repayment, who would be set to fully repay their loans in 10 years or  less. Officials from Education’s loan servicer for PSLF told us they  encourage borrowers who had employment and loans certified for PSLF  to enroll in repayment plans that are more likely to enable them to benefit  from forgiveness.
As of September 2014, nearly two-thirds of borrowers who had  employment and loans certified for PSLF had annual adjusted gross  incomes of more than $20,000 (see fig. 9). In addition, nearly two-thirds  of borrowers were employed in federal, state, or local government (63  percent, or 93,257), and the remainder were employed in the nonprofit  sector (37 percent, or 53,609).
Borrowers who had employment and loans certified for PSLF had higher  student loan debt than Direct Loan borrowers generally. According to the  September 2014 data on borrowers who had employment and loans  certified for PSLF, 80 percent of borrowers had borrowed more than  $30,000, compared to 36 percent of Direct Loan borrowers overall based  on Education’s data (see fig. 10).
To understand the potential costs and benefits of PSLF, we created two  example borrowers—Borrower A and Borrower B—and found that the  program may provide substantial savings over the life of the loan for  qualifying borrowers in IBR and PAYE, without the trade-off of higher loan  costs faced by some borrowers in these repayment plans. In contrast,  borrowers who make all qualifying payments on the 10-year Standard  repayment plan would have paid their loans in full (i.e., have $0 balance)  after 120 qualifying payments (see fig. 11). For each borrower,  forgiveness under PSLF would reduce the amount of the loan that the  federal government collects.
Borrower A enrolled in IBR or PAYE has an initial annual adjusted  gross income of $25,000. PSLF reduces total costs over the life of the  loan to less than $20,000—substantially less than the $60,000  borrowed.
Borrower B, who borrowed the same amount and has a higher initial  annual adjusted gross income of $40,000, also has reduced total  costs under PSLF. In particular, the borrower has lower monthly  payments under IBR and PAYE compared to 10-year Standard  repayment but does not have the higher total loan costs that some  borrowers in IBR and PAYE face, due to PSLF loan forgiveness after  120 payments.
section_title: Education Has Not Assessed Its Efforts to Increase Awareness of PSLF
paragraphs: Education has taken some steps intended to increase borrower  awareness of PSLF, but it has not notified all borrowers who have  entered repayment about the program. As previously noted, Education  aims to compile and distribute information on the costs and benefits of  higher education programs to improve financial literacy and support  borrowers’ decision-making. Although Education provides general  information about PSLF on its website and through social media,  borrowers must actively seek information through these sources.  Education also provides information about PSLF in the borrower rights  and responsibilities statement that is provided when borrowers receive  their loans, and through entrance and exit counseling that borrowers  complete when they begin and end school. In addition, Education has  included information about the program in targeted emails sent to  borrowers in their grace period who had more than $25,000 in debt.  However, Education has not examined borrower awareness of PSLF to  determine how well these efforts are working. For example, although  Education conducts regular surveys of borrowers to measure customer  satisfaction, it has not included an assessment of borrower awareness of  PSLF in these surveys. Beyond its current efforts, Education officials told  us they are considering a PSLF email campaign targeted to borrowers on  income-driven plans and an effort to publicize the program to public  service employers. Education officials told us they have not provided  information about PSLF to those employed in public service because they  do not have a way to identify and target such Direct Loan borrowers.  Apart from its targeted efforts, Education does not directly provide  information about PSLF to all borrowers once they have entered  repayment, which would eliminate the need to identify and target those  employed in public service. Because borrowers are to apply for PSLF at  least 10 years after they enter repayment and after they receive exit  counseling, information provided during repayment could help them make  decisions about forgiveness.
While Education primarily relies on loan servicers to communicate with  borrowers who have entered repayment, it has established few  requirements about what information the servicers should provide on  PSLF and when. Although Education requires servicers to provide  documents on PSLF when borrowers request them—including the  employment certification form and related information—they are not  required to notify other borrowers about the program. While loan servicers  make information about PSLF available through their websites and  customer service representatives, borrowers may not seek this  information if they are not aware the program is available. Education  officials said they rely on a performance-based system to provide  incentives to servicers to manage their loan portfolios and keep borrowers  in repayment, rather than setting specific requirements about how  servicers communicate with borrowers. However, our review of sample  written communications from 2014 for the three selected loan servicers,  which serve about half of borrowers with loans owned by Education,  showed limitations in the PSLF information provided to all borrowers who  have entered repayment. For example, two servicers mentioned PSLF in  their billing statements but did not describe the program terms or benefits;  instead, they directed borrowers to websites with more information.  Another servicer representing about 23 percent of borrowers (more than 5  million) did not provide any information on PSLF to borrowers unless they  requested it. As a result, many of these borrowers may be uninformed  about PSLF. After discussing our preliminary findings with Education in  June 2015, Education officials reported that they are developing plans to  require servicers to include information about PSLF in their initial  communications to borrowers, such as the welcome letter sent when  borrowers are assigned or transferred to a servicer, by the end of  September. However, Education had not yet specified the information  servicers must provide. In addition, servicers would not be required to  provide PSLF information in ongoing communications with borrowers  beyond the initial notification or to the millions of borrowers already in  repayment.
Assessing its efforts to increase borrower awareness of PSLF could  better position Education to identify gaps in borrower awareness of the  program and strengthen its outreach as needed. Such efforts would  support Education’s goal to provide superior information and service to  borrowers. Borrowers who have entered repayment and have not been  notified about the program may be making decisions without complete  information and might miss the opportunity to benefit from the program  when it becomes available in 2017. For example, borrowers might fail to  account for the value of PSLF forgiveness in weighing decisions about  whether to enter public service. Other borrowers who are employed in  public service and meet all program requirements may forfeit potentially  large amounts of loan forgiveness if they are unaware of the program or  do not learn about it in time to make changes that ensure their payments  count toward forgiveness.
section_title: Conclusions
paragraphs: Borrowers need sufficient and timely information to ensure they are aware  of their eligibility for and can make informed decisions about available  repayment options. Although Education has used a variety of approaches  to raise awareness about IBR and PAYE and participation in the plans  has increased, the gap between participation and eligibility and  Education’s own assessment of borrower feedback suggests that  borrowers are not receiving sufficient information about income-driven  repayment plans. Thus, providing consistent information to all borrowers  who have entered repayment would support Education’s goal to provide  superior information and service to borrowers. Moreover, the lower  default rates among borrowers in IBR and PAYE suggest that these plans  may be an important tool for preventing default on federal student loans.  Borrowers also need sufficient and timely information about Public  Service Loan Forgiveness. However, Education has little assurance that  borrowers know about the program, given that it has not assessed its  efforts to raise awareness and relatively few borrowers have had their  employment and loans certified for PSLF. As a result, borrowers  employed in public service for at least 10 years may miss opportunities to  benefit from the program when it becomes available in 2017, potentially  forgoing thousands of dollars in loan forgiveness.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that Income-Based Repayment, Pay As You Earn, and  Public Service Loan Forgiveness serve their intended beneficiaries to the  greatest extent possible, we recommend that the Secretary of Education:  take steps to consistently and regularly notify all borrowers who have  entered repayment of income-driven repayment plan options,  including Income-Based Repayment and Pay As You Earn.  take steps to examine borrower awareness of Public Service Loan  Forgiveness and increase outreach about the program as needed.
section_title: Agency Comments and Our Evaluation
paragraphs: We shared a draft of this report with the Department of Education for  review and comment. In written comments, Education generally agreed  with our recommendations, stating that it is committed to ensuring the  federal student loan borrowers have the information they need to manage  their debt, including details regarding income-driven repayment plans and  loan forgiveness programs. However, Education stated that it is not clear  that providing information on repayment options to all borrowers is the  most efficient or effective way to achieve this goal. Education indicated  that the steps it is taking to raise awareness about income-driven  repayment would include streamlined processes for learning about,  applying for, and recertifying eligibility for income-driven repayment plans  with enhanced communications targeted to borrowers most likely to  benefit from these plans. While these are positive steps, because  Education does not have income and family size information needed to  determine which borrowers could benefit from income-driven repayment,  we maintain it is important for Education to notify all borrowers of these  options. In response to our recommendation regarding Public Service  Loan Forgiveness, Education agreed to examine borrower awareness  and use the results to inform its outreach efforts. Beyond our  recommendations, Education expressed concern that the draft report  overstated the extent to which borrowers lack awareness of income- driven repayment plans. We made revisions to acknowledge the increase  in borrower participation in these repayment plans and to clarify  Education’s ongoing concerns regarding borrower awareness of these  plans. Education also highlighted several of its efforts to increase  awareness of repayment options and support borrowers. We  acknowledged these efforts in our report and incorporated additional  details about them based on Education’s comments. Education also  provided technical comments, which we incorporated as appropriate.  Education’s comments are reproduced in appendix IV.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to interested congressional  committees and to the Departments of Education and the Treasury, the  Bureau of Labor Statistics, and the Consumer Financial Protection  Bureau. In addition, the report will be available at no charge on the GAO  website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (617) 788-0534 or emreyarrasm@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This appendix discusses in detail our methodology for addressing two  research questions for the Direct Loan program: (1) How does borrower  participation in Income-Based Repayment (IBR) and Pay As You Earn  (PAYE) compare to available estimates of eligibility, and to what extent  has the Department of Education (Education) taken steps to increase  borrower awareness of these plans? and (2) What is known about Public  Service Loan Forgiveness (PSLF) certification and eligibility, and to what  extent has Education taken steps to increase awareness of this program?
To address these questions, we used data from Education, the  Department of the Treasury (Treasury), the loan servicer that administers  PSLF for Education, and the Department of Labor’s Bureau of Labor  Statistics. We reviewed relevant federal laws, regulations, and  documentation from Education. We also conducted interviews with  officials from Education and three of its loan servicers, Treasury, and the  Bureau of Labor Statistics; representatives of higher education  associations; borrower advocacy groups; researchers; and a  nongeneralizable sample of Direct Loan borrowers. We conducted this  performance audit from November 2013 to August 2015 in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.
subsections: section_title: Review and Analysis of Data
paragraphs: To examine participation and key characteristics of borrowers in IBR,  PAYE, and other repayment plans, we reviewed summary data from  Education’s National Student Loan Data System (NSLDS) on 19.3 million   Direct Loan borrowers (excluding parent PLUS) who entered repayment  and had an outstanding loan balance as of September 2014. We chose  these parameters in order to get as close as possible to the eligibility  criteria for IBR and PAYE. To determine participation in IBR and PAYE,  we focused on data for 11.2 million borrowers in active repayment (not in  deferment, forbearance, or default). For borrowers with multiple loans, the  repayment plan was based on the most recent loan that either entered  repayment or was loaded into NSLDS. While borrowers with multiple  loans are able to participate in different repayment plans, we found that to  be the case for only 1 percent of borrowers in our analysis.
In addition, we reviewed available estimates of IBR eligibility from a  Treasury analysis of tax return data and Education’s student loan data for  a random sample of borrowers. These estimates, which are based on  September 2012 NSLDS data for borrowers who entered repayment in  2010 or earlier and Internal Revenue Service tax return data from 2010  and 2011, depending on the most recent available for each borrower, are  the most recent and only available estimates of IBR eligibility we  identified. We were not able to estimate eligibility using data from  Education because only borrowers who apply for income-driven  repayment plans are required to provide information on their income and  family size.
We also analyzed data from the Pennsylvania Higher Education  Assistance Agency, the loan servicer that administers PSLF for  Education, on 146,866 borrowers who voluntarily requested and had their  employment and loans certified for PSLF, as of September 22, 2014.  Specifically, we analyzed the number of certifications over time,  repayment plan participation, and available borrower characteristics (i.e.,  sector of employment, amount of student loan debt, and adjusted gross  income).
To approximate the percentage of Direct Loan borrowers who may be  eligible for PSLF, we used 2012 Bureau of Labor Statistics data—the  most recent available. We calculated the percentage of workers  nationwide who were employed by federal, state, and local government  agencies and 501(c)(3) nonprofit organizations, and applied it to our  summary NSLDS data on 16.3 million Direct Loan borrowers (excluding  parent PLUS) who were in repayment, deferment, or forbearance as of  September 2014. We also applied this percentage to the sub-population  of these Direct Loan borrowers who were participating in IBR, PAYE, or  ICR, the repayment plans more likely to enable borrowers to benefit from  PSLF.
To examine how IBR, PAYE, and PSLF may affect total loan costs for  borrowers with various characteristics, we used summary data from  Education’s NSLDS, specifications from November 2014 for a calculator  on Education’s website that allows borrowers to estimate loan payments,  and program requirements based on federal laws and regulations. We  developed repayment scenarios by assigning selected levels of adjusted  gross income and loan debt to a set of hypothetical borrowers to simulate  their total payments under IBR, PAYE, and 10-year Standard plans, and  under PSLF. In each of our scenarios, we assumed: each borrower is single with no dependents; borrowers’ initial annual adjusted gross incomes will increase 5  percent annually, consistent with the assumption Education uses for  its loan calculator;  the poverty threshold will increase at an average annual rate of 2.3  percent, which is based on the Congressional Budget Office’s inflation  rate projections from 2014 through 2024, and is consistent with the  assumption Education uses for its loan calculator; all loans have an interest rate of 6.8 percent, the rate for certain  borrowers with federal student loans disbursed from July 1, 2006  through June 30, 2013; all Direct Loans are subsidized. While borrowers may have a  combination of subsidized and unsubsidized loans, making this  assumption allowed us to show the effect of Education paying the first  3 years of interest if an IBR or PAYE borrower’s payments do not fully  cover the interest owed on a subsidized loan. This assumption  means we might understate total loan costs for IBR and PAYE  borrowers with unsubsidized loans whose payments do not fully cover  interest. Education’s loan calculator assumes that all Direct Loans are  unsubsidized and therefore does not account for this potential interest  benefit for IBR and PAYE borrowers with subsidized loans. Education  officials told us this assumption would have a slight effect on total loan  costs, and that the department plans to revise the calculator by  December 2015 to account for this potential interest benefit.
Changing the assumptions explained above would change the monthly  and total loan costs for borrowers in our scenarios. To the extent  possible, we validated our results against Education’s loan calculator and  worked with Education officials to resolve discrepancies. These scenarios  are intended for illustrative purposes only; they do not incorporate  experiences that could affect individual borrowers’ eligibility for income- driven repayment or their payment amounts. For example, individual  borrowers could experience periodic unemployment or job promotions,  and get married or form families. These and other experiences could  change income levels or household size, which help determine the  applicable poverty threshold for monthly income-based payments.
We determined that data from each of these sources were sufficiently  reliable for the purposes of this report by reviewing existing information  about the data and the systems that produced them, and by interviewing  knowledgeable agency officials.
section_title: Review of Federal Laws, Regulations, Documentation, and Awareness Efforts
paragraphs: To understand program terms and eligibility requirements, we reviewed  relevant federal laws, regulations, and documentation from Education. To  determine the extent to which Education has taken steps to raise  awareness of IBR, PAYE, and PSLF, we reviewed program information  Education makes available to borrowers on its website, including fact  sheets; a loan repayment calculator; and entrance, exit, and financial  awareness counseling tools. We also reviewed information about  Education’s targeted efforts to raise awareness of IBR and PAYE,  including documentation of borrower email campaigns and partnerships,  press releases, and memoranda from the President. We compared  information on Education’s efforts to criteria outlined in contract  requirements applicable to Education’s 11 Direct Loan servicers related to  communication with borrowers and the goals and objectives in the Office  of Federal Student Aid’s Fiscal Year 2012-2016 Strategic Plan.
section_title: Interviews
paragraphs: To examine IBR and PAYE participation and eligibility, PSLF certification  and eligibility, and determine the extent to which Education has taken  steps to raise awareness of the programs, we interviewed officials from  Education, Treasury, and the Bureau of Labor Statistics. In addition, we  interviewed representatives of higher education associations, borrower  advocacy groups, and researchers about student loan repayment and  forgiveness, including factors that may affect borrowers’ decisions about  repayment. We also interviewed representatives of, and reviewed  documentation for, 3 of Education’s 11 loan servicers, which serviced  about half of all recipients of loans owned by Education. In addition,  during April and May 2015, we interviewed a nongeneralizable sample of  14 randomly selected borrowers about their awareness of income-driven  repayment plans. Using a random sample of Direct Loans from a 4- percent random sample of loans from the NSLDS, we identified 4,000  borrowers who, as of January 2014, were in active repayment, deferment,  or forbearance. Education sent emails to these borrowers inviting them to  email us to participate in interviews.
section_title: Appendix II: Selected Characteristics for Direct Loan Borrowers in Active Repayment, by Repayment Plan, September 2014
paragraphs: Income-Based  Repayment (percent)
Pay As You Earn  (percent)
Standard  (percent)
section_title: Appendix III: Status of Public Service Loan Forgiveness Employment Certification Forms, September 2014
section_title: Appendix IV: Comments from the Department of Education
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Debra Prescott (Assistant  Director), Marissa Jones (Analyst-in-Charge), George Bustamante, and  Jeff Miller made key contributions to this report. Additional assistance was  provided by Susan Aschoff, Rachel Beers, Deborah Bland, Ben Bolitzer,  Jessica Botsford, Holly Dye, Hedieh Fusfield, Nisha Hazra, Jenn  McDonald, Jean McSween, Brittni Milam, John Mingus, Mimi Nguyen,  Rhiannon Patterson, Ellen Phelps Ranen, and Cody Raysinger.