A $0 monthly student-loan payment could hurt some borrowers in the long term. An upcoming policy could change that.

• A Philadelphia Federal Reserve paper examined $0 monthly student-loan payments on income-driven payment plans.
• It found that while $0 payments can help borrowers in the short-term, it might not be as benefical down the road.

A $0 monthly student-loan payment might only help some borrowers for so long.

With student-loan payments often presenting a significant financial burden for borrowers, income-driven repayment plans were created with the idea that borrowers would face a monthly payment they can afford based on their income. They would also receive debt cancellation after at least 20 years of qualifying payments.

In some cases, IDR plans would give borrowers a $0 monthly payment that would still count toward their forgiveness process. The Philadelphia Federal Reserve released a working paper examining the impacts of $0 payments, and it found that while those payments can provide significant financial relief for borrowers in the short term, that might not end up being the case down the road.

For example, borrowers on IDR plans must recertify their incomes yearly to ensure their payments are still justified based on income. Using data from first-time IDR applications from 2015 to 2018, the Fed researchers found that borrowers who have $0 monthly payments in their first year on the repayment plan are 3% less likely to reapply for IDR and are 4% less likely to be an IDR plan over the next two years. If they don't do so, they could miss out on forgiveness down the road.

"A $0 payment increases the likelihood that an inattentive borrower becomes disconnected from the student loan system," the paper said.

"These findings suggest that waiving payment requirements provides insurance to struggling borrowers against immediate financial consequences, but when paired with the requirement of an annual IDR recertification, some borrowers experience increased risk of longer run financial distress," it continued.

The researchers also found that 18 months after IDR applications are submitted, borrowers who qualified for a $0 monthly payment are 14% more likely to be delinquent on their student loans than borrowers with incomes above the $0 payment threshold.

There could be several reasons borrowers do not recertify their incomes on IDR plans — if their income increases, for example, a different payment plan might be more affordable than remaining on IDR. However, other borrowers may have trouble navigating the recertification process, or they simply might not know they need to recertify, potentially keeping them from lower payments in the future.

The recertification date for borrowers varies because it's typically based on when they first applied for the repayment plan. However, the Education Department recently announced it extended the deadline to November 1, meaning the earliest borrowers will have to update their information is September.

"During the COVID-19 payment pause, we paused the requirement for you to provide us with your income and family size information in order to keep your IDR plan up to date," the department wrote on its website. "We are now announcing the end date of this pause as part of our continued support for borrowers as they return to repaying student loans."

Still, as the Fed paper explained, $0 payments can cause borrowers to lose track of the requirements for remaining on an IDR plan, and the Education Department's new SAVE income-driven repayment plan could help address that.

Implemented in the summer, the SAVE plan has a range of new provisions intended to give borrowers some more relief. Earlier this year, the department implemented one of the provisions ahead of schedule: debt relief for borrowers with an original balance of under $12,000 who made as few as 10 years of qualifying payments.

There are other provisions expected to be implemented this summer, one of which includes the option for the Education Department and student-loan servicers to automatically recertify a borrower's income if the borrower agrees to disclose their tax information.

Borrowers will still be able to do so manually, but the automatic option could protect those with $0 monthly payments from falling behind on the payment plan's requirements.