Ending the black hole that’s devouring student loan payments

Early in Aubrey Plaza’s recent movie, Emily the Criminal, her character is seen calling her student loan servicer, between food delivery shifts, to ask why her recent $400 payment wasn’t applied to her balance. She is stunned by the response: “It was applied to my interest? Sorry, how much interest is being added a month?” The scene cuts to her texting what turns out to be a credit card fraud ring in hopes that she can make extra money, fast.

While most people do not turn to crime to pay off their student loans, the demoralizing experience of making student loan payments month after month only to see the balance stay the same — or even grow — is common. In an effort to make student loan burdens more affordable, the government offers an array of payment plans that set monthly payments at a percentage of the borrower’s income. 

But as millions of people have enrolled in these plans, a problem has emerged: When borrowers’ monthly payments are lower than the amount of interest that accrues that month, their balance goes up instead of down. Recent studies have found that 75 percent of borrowers in these plans owe more than they originally borrowed five years after entering repayment, and even 12 years after starting school nearly 40 percent of all student loan borrowers owe more than they originally borrowed. The problem is particularly severe for Black borrowers, who have to borrow more to go to school and have fewer financial resources to pay. After 20 years, the median Black borrower still owed 95 percent of the amount they borrowed. Stuck or increasing balances contribute to the $1.7 trillion student debt crisis and lead borrowers to feel hopeless or scammed.

The new student loan payment plan proposed by the Biden administration recognizes the problem but offers only half of the solution. The plan changes would cut many borrowers’ monthly payments in half to 5 percent of their income, and, like existing income-driven plans, any remaining loan balance would be canceled after 20-25 years of payments (or, a more reasonable 10 years for people who borrow under $12,000, with an extra year of payment added for each additional $1,000 borrowed up to $22,000). To address the problem that many people’s monthly payments will be less than the amount of interest they are being charged by the government each month, the administration proposes to write off any monthly interest in excess of the borrower’s payment.

That change would prevent borrowers’ balances from growing as long as they are making their payments every month. But it would not put borrowers on track to reduce their balances through their payments. Like the character Emily, millions of real-life borrowers would continue to make monthly payments that won’t make a dent in their balances. And they’ll still be expected to throw money into this black hole for 20 years — while filling out paperwork and proof of income every year for the privilege. 

It doesn’t have to be this way. In an unlikely convergence, student loan servicers and advocates for low-income borrowers have both proposed redesigning income-driven repayment plans to offer incremental relief during repayment. Instead of only writing off any unpaid interest every month — as under the current proposed plan — the government would write off any difference between the borrower’s income-adjusted payment and what their payment would be on a standard repayment plan for the same term. As a result, loan balances for all borrowers would decrease steadily over the repayment period, with nothing remaining to cancel at the end of the term. 

Families holding student loan debt could finally see their balances steadily drop with each payment. And borrowers could pay off their loans much sooner — allowing them to move out from under the weight of their student loan debt and move on with their lives.     

This is not a novel idea. Harvard Law School, among others, offers its graduates a “Low Income Protection Plan” that operates on the same principle, subsidizing income-based student loan payments to ensure that its graduates can make steady annual progress towards paying off their loans and be debt-free after 10 years. Such financial security, and grace, shouldn’t be reserved for Harvard students. Everyone should have a path to pay down their student debt, and it shouldn’t take a criminal side hustle to do it.

Abby Shafroth, is an attorney and director of the Student Loan Borrower Assistance Project at the National Consumer Law Center (NCLC) and is an expert on student loan law and policy.