Lapsing on student loan payments can make it hard for graduates to buy a home, a car or even land a job. With more than 11 percent of student debt in default, some experts are pushing for changes to repayment programs.
Student debt climbed $20 billion during the first few months of 2013, totaling $986 billion on March 31. Roughly $110 billion of that balance is more than 90 days past due, according to a quarterly report released in May by the Federal Reserve Board of New York.
Those late payments could be easily avoided by simplifying the repayment process, certain experts say. Some lawmakers and advocacy groups are pushing to reduce the number of repayment options and automatically enroll all borrowers in an income-based plan.
"Our repayment system has been patched so many times over the years with well-intentioned ideas that it has become unnecessarily complex and the source of many needless defaults. Many borrowers are not even aware of the various options available to them," Rep. Tom Petri, R-Wis., wrote in a recent Op-ed published by multiple news organizations.
[Discover two new ways to pay off student loans.]
All told, federal loan borrowers have seven repayment options available to them, including standard repayment, which sets fixed monthly payments based on the total loan amount.
Income-based repayment is already an option for students with federal loans. Separate "income-contingent," "income-sensitive" and "pay-as-you-earn" plans are also available. In most cases, borrowers must demonstrate a certain level of financial hardship to qualify.
Petri introduced the Earnings Contingent Education Loans Act of 2013, the ExCEL Act for short, last month. The bill would automatically enroll all borrowers in income-based repayment, regardless of income level.
Much like the current option, borrowers would pay a percentage of their annual earnings. One major difference: Petri's proposal eliminates avenues to clear loan balances and caps interest at 50 percent of the total loan balance at graduation. Current plans wipe out unpaid loans after 10 or 25 years.
While Petri's plan is not perfect, it's on the right track, says Rory O'Sullivan, policy and research director for Young Invincibles, a national advocacy group.
"We're glad that he put it out there, particularly for the automatic repayment side," says O'Sullivan, who earned a bachelor's from Pomona College and a joint J.D./master's in public policy from Georgetown University.
Those degrees did not come without a substantial amount of student loans, which he eventually consolidated and began repaying via the current income-based option, he says.
"It was a very hard process for me to navigate," he says. "I can understand why many people fall through the cracks."
O'Sullivan is not alone. Nearly two-thirds of high-debt borrowers – those with $75,000 or more in student loans – say loan repayment brought a lot of surprises, including interest rates, monthly payments and repayment options, according to an October 2012 report by NERA Economic Consulting and Young Invincibles.
"I think there needs to be a much more approachable way to go about learning how to repay the loans. Much of the information was provided in 'legalese' that made it difficult to understand," one survey respondent said.
Information is not the only issue, O'Sullivan says.
"No matter how much information you give, it's just unnecessarily complex," he says. "I just imagine students in there with a fine-tooth comb, trying to figure out which plan is right for them."
Automatic income-based repayment has backing from one key group: students.
Nearly 90 percent of student leaders – those active in campus organizations such as student government, fraternities or sororities – surveyed by Young Invincibles support the idea because it simplifies the financial aid process, according to a November 2012 report. The nonprofit group only surveyed 72 student leaders, but it's an important group to have on board as respondents echoed the opinions of their peers, O'Sullivan says.