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Opinion: It is Time for the Government to Automate Income-Driven Repayment Certification

Yearly income certification trips up many federal borrowers and this problem could easily be avoided by automating the process.

Written By: Michael P. Lux, Esq.

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Each year, borrowers on income-driven student loan repayment plans are required to certify their income. In most cases, borrowers authorize the Department of Education to access their most recent tax return. This information is used to calculate monthly payments for the next year.

While the income certification process is relatively easy for most borrowers, there are some issues. Sometimes borrowers miss the deadline because of an oversight or a miscommunication. Other times, the mistakes and delays happen because of loan servicers.

When income certification issues arise, it can be very expensive for borrowers. Fortunately, many of the issues that borrowers deal with today can be eliminated through automation.

Making the Shift to Automatic Yearly Income Certification

Anyone who has ever completed their yearly income certification knows that the process is quite simple: Log in. Verify contact information and family size. Link up with the IRS to provide last year’s tax return. Submit.

According to the Department of Education, the entire process takes most people 10 minutes or less. Shifting to an automated system wouldn’t require much.

For the vast majority of borrowers, the only thing that will change from one year to the next is the tax return. Rather than authorizing the Department of Education permission to access the tax return each individual year, a borrower could simply allow ongoing access to adjust IDR payments each year.

This change in processing income certification may not seem groundbreaking, but it has major implications.

Missing Certification Deadlines can Have Major Consequences

Suppose someone is living just above the poverty line, and as a result, they have $0 per month payments on their loans. If they are injured and end up in the hospital, or change address, or miss a letter from their servicer, it would be easy to miss a certification deadline

This person would have late fees and damage their credit report all for a loan that shouldn’t require payments. Through no fault of their own, someone could miss the deadline for a largely unnecessary process and face consequences that last for years.

The issues go beyond credit scores and late fees. Missing a certification deadline also causes the outstanding interest on the loan to capitalize. Interest capitalization is one of the main causes of student debt balances that spiral out of control.

Automation Helps Avoid Loan Servicer Mistakes

In some cases, borrowers do everything correctly, including meeting the deadlines set out by the servicer, but the servicer isn’t able to process the request in time.

Servicers will usually put borrowers on an administrative forbearance when this happens. Not requiring payments may seem like a reasonable remedy, but it is a massive setback for many borrowers.

Here again, we run into a situation where the outstanding interest is capitalized.

Additionally, borrowers that are working towards student loan forgiveness will be delayed in their efforts. The time on an adminstrative forbearance will not count towards any of the various federal forgiveness programs.

The Current Process Makes the Government and Loan Servicers Look Shady

There is a strong argument that both the government and loan servicers profit from making the process unnecessarily difficult.

When borrowers are charged unnecessary late fees or have their interest capitalized, the student loan becomes more expensive.

If these costs are incurred because a borrower didn’t receive an email or a letter, or because the servicer couldn’t process an application fast enough, it looks bad. There shouldn’t ever be a finanical incentive for lousy service. When this happens, borrowers legitimately wonder if they are being jerked around just so that the government and the loan servicers can make a few extra bucks.

Going to an automated process will protect borrowers from unnecessary fees and interest. It should also help loan servicers and the Department of Education earn some trust with the people they are supposed to serve.

What the Process Could Look Like

Each year loan servicers contact their borrowers to remind them that they are approaching the deadline for income certification.

Instead of reminding them of the deadline, they could simply provide notice that their monthly payment will be recalculated in the coming weeks.

Borrowers that have gotten married, had a child, lost a job, or experienced a significant change in income may need to take extra steps. Others will need to take no action at all.

As always, if a borrower loses their job or has a pay cut, they could still request an immediate recalculation.

Ultimately, an automated process would be substantially similar to the current system. The big difference is that it would be significantly more efficient and treat borrowers far better.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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