Direct Student Loans

Analyses of Borrowers' Use of the Income Contingent Repayment Option Gao ID: HEHS-97-155 August 21, 1997

The William D. Ford Federal Direct Loan Program contains a unique repayment option. Called income contingent repayment, this option ties borrowers' monthly payments to their incomes, family sizes, and student loan amounts. Borrowers with low incomes or high-debt loans can fit their student loan payments into their budgets because the size of their payments can expand or contract with their ability to pay. This report provides information that should help Congress assess how borrowers have been using the income contingent repayment option. GAO answers the following questions: To what extent are borrowers using the income contingent repayment option compared with other repayment plans available under the program? How do loan delinquencies and defaults under the income contingent repayment option compare with delinquencies and defaults under other program repayment plans? How do borrowers' loan payments under the income contingent repayment option compare with payments under other program repayment plans? How does the Education Department verify the accuracy of incomes reported by borrowers using the income contingent repayment option?

GAO noted that: (1) as of March 31, 1997, about 663,000 borrowers owing about $5.3 billion in FDLP loans were repaying loans; (2) about 9 percent of these borrowers were using ICR; (3) GAO found that 80 percent of borrowers using ICR either were current in their monthly payments or had their payments suspended because they were in school or for other reasons; (4) borrowers using ICR tended to be delinquent or in default at higher percentages than borrowers using other repayment plans; (5) borrowers who have been placed into the ICR plan because they have defaulted on an Federal Family Education Loan Program (FFELP) loan are a major factor in the higher percentage of defaults for ICR users; (6) of the 2,832 borrowers using ICR and in default, 2,083, or 73.6 percent, had defaulted on an FFELP loan; (7) comparing estimated total loan payments for ICR users and borrowers who use the three other repayment plans is complicated; (8) compared with borrowers who use the standard repayment plan, ICR users and those using extended and graduated plans generally face higher total payments; (9) compared with borrowers who use the extended or graduated repayment plans, ICR users face comparatively higher total payments if their incomes are low but comparatively lower total payments if their incomes are high; (10) the Department of Education checks the reported income of borrowers using ICR in one of two ways; (11) for borrowers who are in their first year of repayment or who may have recently lost their jobs, the Department relies primarily on documentation submited by the borrower, such as pay stubs, dividend statements, or cancelled checks; (12) the Department does not verify the accuracy of this documentation when it is submitted; rather it relies on a signed certification from the borrower that the information is complete and accurate; (13) for borrowers who have been out of school for a year or more, the Department obtains income information directly from the Internal Revenue Service (IRS); (14) the Department does not verify the accuracy of information borrowers provide IRS but relies on IRS' verification process; (15) however, during the transition from using borrower documentation to using IRS information, the Department compares the income amounts from the two sources for discrepancies; and (16) if there are significant discrepancies or if borrowers do not cooperate in providing correct income information, they are removed from the ICR plan and placed into another repayment plan.

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