A federal government experiment to confront student-loan defaults is raising the question whether more consumer lenders should take a second look at income-based repayment plans.
An income-based plan typically lowers monthly payments and helps borrowers qualify for loan forgiveness sooner. While Obama and other elected officials hope to head off a projected massive wave of student-loan defaults, lenders have been reluctant to expand income-based plans for mortgage and other consumer loans for fear they will be stuck with unpaid debt.
But advancements in number crunching may make it easier to identify good candidates and smartly rework loans, one of the large credit bureaus and others are arguing.
Needless to say the data tool at the heart of the argument is something the credit bureau, Equifax, is pitching to the Education Department and other lenders.It is a database, marketed under the name WorkNumber, with real-time payroll information on holders of college-loan debt.
It is the latest example of firms using so-called Big Data to tweak and customize loan offerings and repayment plans. And it comes amid a surge of defaults in student loans and an increase in chargeoff rates for credit cards and other consumer loans.
"The data says that, yes, you can identify who is likely to default on a student loan," said Naser Hamdi, director of market insight and strategy at Equifax. "If you use this data to expand [income-based repayment plans], you're putting the borrower on an upward trajectory and you are also mitigating your own risk."
The problem, Hamdi said, is that the Education Department now uses only "an outdated piece of information," tax returns, to qualify borrowers for income-based plans. If the department is expanding income-based repayment plans anyway, they should switch to a better way to assess risk, he said.
Tax returns are a poor predictor of future income, said Nick Clements, co-founder of MagnifyMoney.com, a consumer website for financial services products.
"A tax return is an inherently backward-looking view of income and risk," Clements said. "Your first job out of college is not aligned to tax filing schedules."
Equifax does not have the market all to itself. The other two major credit bureaus offer related products and Paychex, the second-largest payroll accounting firm, may enter the market.
Experian's Income Insight product uses verified income data to help lenders estimate future income, said Kristine Snyder, a company spokeswoman. Experian also offers a debt-to-income analysis product, she said.
TransUnion's product, CreditVision Income Estimator and Debt-to-Income Estimator, uses a number of data sources, including investment income, alimony, pensions and real estate income, said Clifton O'Neal, a company spokesman.
Paychex currently does not offer a database product for loan-plan placement, but it is something the company is exploring, said Andrew Childs, vice president of marketing.
"We're working on the kind of technology that could enable a service like this and think it's an interesting opportunity," Childs said.
And Equifax has not limited the marketing of its database to student lending. Banks already use the database to confirm data to meet consumer regulatory requirements. But nonbanks are starting to use the product for other loan types, including auto loans and credit cards, Hamdi said.
"These online-lending platforms are trying to cater to recent graduates, individuals who have not yet established a credit history," he said.
As to income-based repayment plans, some lenders question the need for what Equifax is offering.
Sallie Mae, the largest private student lender, has offered income-based plans since 2009, and it cautions borrowers that adopting the plan type will increase the overall amount that they will pay, said Martha Holler, a company spokeswoman. Moreover, Sallie Mae has a "high-quality" loan portfolio and the "overwhelming majority of our borrowers are managing their payments with great success," Holler said. Among its borrowers, 80% have a FICO score of at least 700, she said.
The marketplace lender Social Finance works with borrowers who are having trouble making payments because of a job loss by putting their loan in forbearance and helping the borrower find a new job, Chief Executive Mike Cagney said. If other factors have made it difficult for a borrower to make payments, SoFi will try to work out a repayment plan.
"We don't guarantee you'll get such a plan, but our general approach is to work with borrowers," Cagney said.
Clements, on the other hand, said Equifax's product would likely benefit lenders by giving them a more accurate picture of the financial means of borrowers who have just entered the job market.
"Providing a link between the monthly payment and the borrowers' earnings makes perfect sense and would likely be effective" in helping lenders and servicers develop the best type of repayment plan, Clements said.
Equifax has had discussions with the Education Department about adopting WorkNumber, and it is also marketing the product to student-loan servicers and to private lenders who have originated college loans that are guaranteed by the federal government. Both Hamdi and the Education Department declined to comment on their discussions.