When her first student loan payments came due last year, Suzanne Sublette might have seemed an ideal candidate for a federal program to base her monthly bill on her income. On her way to a master's degree and a Ph.D., Sublette, a sociology lecturer at Gateway Technical College in Kenosha, Wis., had borrowed more than $115,000.
Now, months after she first tried to sign up for the repayment plan, Sublette is still jumping through bureaucratic hoops. If she succeeds, the government will lower her monthly bill by about $150. Because her job is considered "public service," her federal loans will be forgiven after 10 years. Sublette loves the idea of the program, she said, but she wonders: if someone with a master’s in social work and a Ph.D in educational policy can’t navigate the system, who can?
Amid rising concern about student debt, fewer borrowers are taking advantage of the Education Department's income-based repayment option -- which lets them pay 15 percent of their monthly income toward federal student loans -- than could benefit from it. In March, the New York Federal Reserve found 5 million Americans had fallen behind on student loan payments. Only 1.1 million borrowers are enrolled in income-based repayment. Another 474,000 are in income-contingent repayment, a similar program with slightly different rules, but many of those were automatically enrolled after defaulting on their loans. (Private loans, which make up about 15 percent of all student debt, aren't eligible.)
Student debtors and their advocates say the repayment programs remain something of a well-kept secret, little-known among recent graduates and struggling borrowers. Even for those in the know, enrolling can be complicated and confusing.
In a June memorandum , President Obama summed it up: “Too few borrowers are aware of the options available to them to help manage their student loan debt, including reducing their monthly payment through” income-based repayment, or IBR, Obama wrote. “Additionally, too many borrowers have had difficulties navigating and completing the IBR application process once they have started it.”
It was President Clinton, during his first campaign for the White House, who first promised to create a system of student loan repayment adjusted for income, and some form of the program has existed for nearly two decades. In part, it was meant to help graduates pursue careers in teaching, social work and similar fields that require a college degree but are relatively low-paying. After 10 years of income-based repayment for workers in government or at nonprofits , and 25 years for others, the loans are forgiven.
Changes to federal student loans in 2010 expanded income-based repayment programs. In his memorandum, Obama proposed another expansion. The new system, called "Pay As You Earn," would lower monthly payments to 10 percent of a borrower's discretionary income, from 15 percent, and forgive loans after 20 years, not 25. It would also make parts of the application simpler.
Some are skeptical: A New America Foundation report  last week found the changes would benefit high-debt, high-income borrowers like Sublette more than poor borrowers. The researchers suggested the expansion could encourage graduate schools to charge more, knowing students' payments will be manageable no matter how much they borrow.
Should Obama lose his bid for re-election, a Romney administration seems unlikely to keep Pay As You Earn. Romney opposes student loan forgiveness , and Congressional Republicans have said  they worry lower monthly payments just encourage students to take on more debt. If Obama wins and the changes proceed, they still will not address all the roadblocks that confront even savvy student borrowers -- people like Aaron Smith, the executive director and co-founder of Young Invincibles, a political advocacy group for Americans under 35.
When Smith graduated from law school, he knew about income-based repayment and wanted to enroll. As he confronted the complicated enrollment process -- like many graduate students, he first needed to consolidate his loans -- he asked for help from a colleague who focused on student loan policy.
“A lot of people understand the promise of this program, and we’re moving in a very positive direction,” Smith said. But he said it has a long way to go before enough borrowers reap its benefits.
Lack of Awareness
Many borrowers enrolled in income-based repayment said they heard about it from friends or parents, not colleges. The Education Department is creating new exit counseling requirements that will make sure students who are graduating are better-informed. Still, exit counseling reaches only graduating students, not dropouts, who are more likely to have trouble repaying their loans. Nor does it reach alumni who started repayment but later lost jobs or income.
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“There’s no question that much more outreach is needed so that borrowers at all stages of the repayment process are aware of IBR,” said Lauren Asher, president of the Institute for College Access and Success.
Letters to borrowers who are delinquent do not always explain income-based repayment. One letter to a delinquent borrower from the government’s direct loan servicing center demanded an immediate repayment of more than $20,000 to avoid defaulting. Only at the end did the letter, written in May and included in a National Consumer Law Center report , indicate that the borrower could “change repayment plans in order to avoid defaulting on your loan(s).” It gave no specifics.
“There are opportunities where borrowers could have been told about it and just haven’t been,” said Persis Yu, a staff lawyer with the consumer law group, who said only a handful of her clients in the past year had heard of income-based repayment. Most of the center’s clients are already delinquent or in default, and many are poor or disabled.
Law schools, where concerns about debt and employability have grown recently, talk up the income-based repayment programs, Yu said. Vocational programs and job training often do not, and neither do social service agencies helping the poor and unemployed.
Advocacy groups say loan servicers have the most responsibility to tell delinquent borrowers about income-based options. Nine percent of borrowers who entered repayment between Oct. 1, 2009, and Sept. 30, 2010, defaulted on their federal loans by September 2011, according to recently released Education Department data . Those borrowers, Asher said, could have been helped by income-based repayment -- if they had been informed about the program and helped to enroll.
"Over a million students are using IBR, which is a good start," Education Department spokesman Justin Hamilton said. "But many more are eligible. We will continue working to ensure that all students who could benefit from IBR are aware of this helpful tool and taking advantage of it."
For borrowers with only one type of federal loan, entering income-based repayment is fairly straightforward. For borrowers with graduate or parent PLUS loans, or for borrowers with different types of federal loans, the process quickly gets complicated.
The options are a maze even experts say they struggle to navigate. The Education Department offers two main income-based programs: income-based repayment, which requires borrowers to prove financial hardship by showing their loan payments are eating up too much of their discretionary income, and income-contingent repayment, which does not require proof of financial hardship. (It also offers extended repayment, which reduces monthly payments by stretching a loan's term to 12 to 25 years, and income-sensitive repayment, which is only for loans made under guaranteed lending before 2010.)
Borrowers enroll in the programs through their servicers, the public and private agencies that manage the government's student loan portfolio. In some cases, if borrowers have PLUS loans or loans from more than one servicer, they must first consolidate their loans. As of a year ago, nearly 6 million borrowers had loans from both the federally guaranteed program, which ended in 2010, and the direct loan program, administered by more than one servicer. The Education Department has urged those so-called “split borrowers” to consolidate, in part because they are considered more likely to default.
The consolidation process alone can be intimidating. Surveys have found many borrowers don't know the difference between private and federal loans, let alone the differences among types of federal loans -- distinctions that can be important when applying for income-based repayment.
Kailyn McCord graduated from Reed College in 2009 with about $20,000 in federal loans. At her first job at a nonprofit theater company, she was making less than $13,000 per year. After several days of struggling to figure out consolidation, she gave up on income-based repayment, and now pays about $250 per month on her loans. If she had successfully enrolled, she would have paid nothing, according to an Education Department calculator .
Sublette, the sociology lecturer, had more success: she contacted her servicers and arranged for the first consolidation she would need. The process hit snags with her servicers, and she went into forbearance -- not repaying, as interest accumulated -- before giving up and making her first $1,000 monthly payment. The paperwork was a headache in some cases, since it cannot be completed electronically, but the servicers were the most difficult part, she said.
The process is simpler for borrowers with only one servicer, or who borrowed only one type of loan. The administration plans to make it easier by verifying income information directly with tax records. Yu, of the consumer law center, said she hopes that will also help borrowers who do not pay income taxes, a low-income group who often encounter difficulties because the enrollment process relies on information from the Internal Revenue Service.
With the proposed changes have come increased publicity. “Pay As You Earn” has even played a small role in the presidential election: the Obama campaign’s website includes a page  explaining the benefits in simple terms. The administration has proposed a form to help borrowers navigate the options; it would offer the choice to check a box for the smallest monthly payment.
Researchers and advocates argue that more changes are needed to get more borrowers out of delinquency and default and into income-based repayment. They suggest making it the default option for students entering repayment. (Students who make more would pay off their loans sooner and pay less in interest.) Ideally, some have argued, the payments could be collected through a payroll deduction, a system used in Australia, New Zealand and the United Kingdom. Representative Tom Petri, a Wisconsin Republican and longtime supporter of income-based-repayment plans, is drafting legislation to create such a program.
“If we have these backstops for students, for borrowers, to keep them from falling delinquent and defaulting, I wonder if we ought to be looking at an auto-enrollment into IBR going forward,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators. Some might pay more interest over time, he said. That could still be a better option than the black mark that delinquency and default leave on credit reports.
For those who successfully enroll in the program, it can be a lifeline. “Having something already on the books that we can use to actually address and relieve student debt to some degree I think is incredibly important,” said Smith, of Young Invincibles. “We just have to maximize it.”
That's little comfort to frustrated borrowers like Sublette. On the verge of consolidating her loans and finally getting income-based repayment, she got a message: one loan had been transferred to a new servicer. Months into the process, she'd have to start it all over again.