By Joanna Pearl | September 27, 2021
The economic downturn triggered by the COVID-19 pandemic has been far reaching and devastating for Americans. The recession caused almost unprecedented job loss. Recovery has been slow, and for many it remains elusive. Women (among them, disproportionately Black and Latino women), young adults, those with less education, and immigrants were hit hardest by COVID-related job losses. As of June 2021, Black workers continued to experience higher unemployment rates than other groups.
Among the policy interventions aimed at helping those struggling economically throughout the pandemic has been the U.S. Department of Education’s (ED) payment pause and interest waiver on federal student loans. This pause will be ending January 31, 2022, meaning that the 40 million Americans who owe federal student loans will have loan payments due for the first time since March 2020.
Student borrowers whose economic situation has worsened in the past 18 months—because, for example, they or their spouse lost a job, had hours reduced, or were forced to work less to care for dependent family members—will face new struggles to keep up with their student loans. For these borrowers, the Department of Education’s Income-Driven Repayment (IDR) plans offer hope of achieving manageable monthly payments and avoiding default.
But these struggling borrowers will also face a new barrier to IDR based on their diminished economic circumstances: they likely will have to demonstrate their income using what the Department calls “alternative documentation of income” or ADOI, because their tax returns from the past two years do not reflect their current—now lower—income. And failures in the design of IDR and ADOI may prevent borrowers who most need this relief from accessing it.
Worse, these problems are so structural that they existed before and, without action, will continue to linger long after the COVID pandemic.
A new SBPC report sounds a warning that failures in the design of the IDR application process using ADOI may exacerbate the unevenness of pandemic recovery along racial lines. The report looks at the problems with ADOI as a means of securing access to IDR and considers evidence that the design of the IDR application—and how ADOI is handled by servicers—may be disadvantaging borrowers of color. It looks at parallels to and lessons that can be drawn from the borrower experience with the Home Affordable Modification Program (HAMP), a federal program born out of the Great Recession and designed—like IDR—to help struggling borrowers avoid default. The experience from HAMP counsels that the ADOI process, in particular, should be assessed and improved so that borrowers in need can fully and equitably access the protections available to them under the law.
Read our new report: Driving Inequity: Are IDR’s Documentation Requirements Hurting Borrowers of Color?
IDR was meant to be broadly available—but access to it is unequal across races
Nearly three decades ago, Congress created IDR as a means to address the growing burden of federal student loan debt. Payments would be based on borrowers’ earnings, not their loan balance, and borrowers would be entitled to loan forgiveness after decades of repayment. This relief would be available to all struggling federal student loan borrowers.
Evidence abounds that IDR has fallen short of its goal of being broadly available.
Unfortunately, evidence abounds that IDR has fallen short of its goal of being broadly available. Instead, access has fallen starkly across racial lines. For example, research by SBPC shows that Black borrowers are twice as likely as white peers to fall behind on federal student loans without accessing IDR, contributing to disparities in delinquency and default. Federal fair lending enforcement officials have similarly noted the presence of “disparities in outcomes” across race related to differences in student loan servicing quality.
These outcomes are, in part, reflections of policy choices about the implementation of IDR, particularly with regard to how ED designed the process for borrowers to enroll in the protection. One key enrollment step poses particular challenges: proving one’s income and family size. To do this, borrowers can submit a tax return or, if they either did not file a federal income tax return for either of the two most recent tax years or if their income has changed since their last filing, they can submit an “alternative” documentation of income such as a paystub.
ADOI is widely used to prove income and family size—in 2016, one large student loan servicer stated that about 50 percent of borrowers who enroll in IDR use it or certify that they have no income at all. But it is also extremely difficult. According to ED’s instructions, borrowers have to provide at least one document proving every source of income, write down the frequency at which they receive their income, and also often attach a signed statement explaining each source of income.
All told, borrowers who have to apply for IDR with ADOI are required to exert significantly more effort—identifying, gathering, and transmitting documents—than those who use a tax return simply by electing to share their information directly from the IRS. The complexity of ADOI serves as a chance for student loan servicers to derail borrowers trying to access IDR. Borrowers report frustration with and difficulty navigating the ADOI process that knock them off track in repayment:
Most recently, now that I’m on the IBR repayment plan, for the past 6 months, they have made error after error after error in rejecting my income verification forms despite them being correct; they have now continued to keep me in forbearance even after a supervisor told me 2 months ago I was all clear and had nothing to worry about. Everyone answering their phone calls tells me something different.
History shows that administrative hurdles such as those endemic to ADOI disproportionately harm consumers of color. Lessons from the mortgage market make clear that racial disparities and consumer harm arise when borrowers have to jump through unnecessary hurdles to access relief. In response to the financial crisis, federal policymakers created the Home Affordable Mortgage Program (HAMP) in 2009 to help borrowers to avoid foreclosure by modifying loans to a level that was affordable and sustainable. But to access HAMP, borrowers had to submit applications and documents enumerating their current income, assets and expenses, as well as any specific hardship circumstances. The HAMP application process was often long, paper-intensive, and frustrating for borrowers.
As a result, HAMP left behind borrowers of color who needed help—and who had been hit hardest by the mortgage crisis that led up to the Great Recession. For example, a 2010 survey from the National Community Reinvestment Coalition (NCRC) found that white HAMP-eligible borrowers were almost 50 percent more likely to receive a modification than African‐American HAMP-eligible borrowers. In addition, the Government Accountability Office (GAO) found that Black and Hispanic mortgage borrowers were more likely to be denied loan modifications.
This legacy should raise alarm bells for policymakers—just as it should have when IDR was initially designed. Because when the protections that borrowers are legally entitled to are hidden behind administrative walls, the borrowers who need help the most—including borrowers of color—are less likely to access them.
The Biden administration must act to eliminate racial disparities in outcomes for student loan borrowers.
All borrowers deserve protection from unaffordable student loan debt, and IDR is meant to deliver it. But as currently designed, IDR does not equally reach all borrowers who need it. Instead, Black and Latino borrowers are more likely to miss out and fall behind on their student loans without accessing this key protection.
When the Department of Education considers IDR in its upcoming negotiated rulemaking, it has the chance to eliminate many of the administrative hurdles blocking borrowers who could benefit from IDR the most from easily enrolling. The ADOI process should be at the top of the list for study and improvement, particularly as a new wave of borrowers will likely be forced to use this method to apply for IDR in 2022.
Our new paper includes several recommendations for ED, the Consumer Financial Protection Bureau, and regulators and enforcers at the state and federal level to address these challenges. It’s time for the federal government to deliver all borrowers the protections they are entitled to—regardless of race. It’s time to restore the promise of IDR.
Read more of the Student Borrower Protection Center’s work related to Income-Driven Repayment here.
Joanna Pearl is a Student Loan Justice Fellow at the Student Borrower Protection Center and the former Enforcement Chief of Staff and Acting Principal Deputy Enforcement Director for the Consumer Financial Protection Bureau. She most recently served as Chief Operating Officer at Public Rights Project, a nonpartisan nonprofit that empowers state, local, and tribal governments to fight for civil rights and economic and environmental justice for their communities. Joanna previously worked as an Associate at Pillsbury Winthrop Shaw Pittman LLP, where she focused on commercial litigation and employment counseling and defense. Joanna began her career in state government as Legislative Assistant and Chief of Staff to Representative Jay R. Kaufman in the Massachusetts State House of Representatives. She is a graduate of Yale College and Harvard Law School.