Federal Student Loans: Education Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options
Released: 2015-09-17T00:00:00

Letter

Background

Federal Student Loans

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.

Loan Repayment Plans

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.

Public Service Loan Forgiveness

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.

Many Eligible Borrowers Do Not Participate in IBR and PAYE, and Education Is Missing Opportunities to Increase Awareness of These Plans

Many Eligible Borrowers Do Not Participate in IBR and PAYE

Eligibility and Participation

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).

Factors That May Affect Participation

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.

Characteristics of Participating Borrowers

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.

Education Has Not Consistently Provided Information on Income- Driven Repayment Plans to Borrowers

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.

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

About 147,000 Borrowers Had Employment and Loans Certified in Anticipation of PSLF, and 4 Million Borrowers May Be Employed in Public Service

Certification of Employment and Loans

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.

Key Characteristics of Borrowers Who Had Employment and Loans Certified

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.

Education Has Not Assessed Its Efforts to Increase Awareness of PSLF

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

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Appendix I: Objectives, Scope, and Methodology

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.

Review and Analysis of Data

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.

Review of Federal Laws, Regulations, Documentation, and Awareness Efforts

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.

Interviews

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.

Appendix II: Selected Characteristics for Direct Loan Borrowers in Active Repayment, by Repayment Plan, September 2014

Income-Based Repayment (percent)

Pay As You Earn (percent)

Standard (percent)

Appendix III: Status of Public Service Loan Forgiveness Employment Certification Forms, September 2014

Appendix IV: Comments from the Department of Education

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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.