Student Loan Forgiveness Is Set to Cost Taxpayers Billions More Than Expected
That sum is more than double the U.S. Education Department’s current estimate for the cost of such income-driven repayment plans — an umbrella term for the five repayment plans that base payments on a borrowers’ earnings — and roughly four times the department’s original estimates, the report found.
Income-driven plans, which are designed to reduce loan bills to a manageable percentage of monthly income, can be a huge help to struggling college graduates. But some policy experts have raised concerns about the cost of the programs — particularly given the large number of borrowers with graduate school debt who qualify for the programs despite earning high salaries. A key issue: The education department doesn’t break out numbers for different plans, so it’s hard for analysts to calculate how much this latter group is costing the federal government.
Soaring Participation
Current versions of income-based repayment were developed during George W. Bush’s administration, but the Obama administration increased the number of plans and expanded the scope of who qualifies. As a result, enrollment in income-driven plans has grown massively in the past few years.
As of the end of June, the outstanding balance in income-driven repayment plans was $269 billion, or 40% of the federal government’s total portfolio of loans made directly — and the number of borrowers in these plans had doubled to 5.3 million in just two years.
The GAO’s analysis assumed that 61% of the total $352 billion in loans in income-based repayment programs would eventually will be repaid — leaving another $108 billion to be forgiven. (Another relatively small share will be discharged because of death or disability.)
5 Ways President Trump Could Affect Your Student Loans
1. Income-driven repayment changes are likely
Under Trump’s proposed student loan program, he would cap repayment at 12.5% of a borrower’s income. He did not indicate if this repayment cap would apply to all federal loan borrowers or only for those who apply for income-driven repayment, as is the case now. In the most widely available income-driven repayment plan currently available to student loan borrowers, known as Revised Pay As You Earn, or REPAYE, monthly payments are capped at 10% of a borrower’s discretionary income.
2. Private banks — not the government — might issue federal student loans
Trump wants to restore a system in which private banks issue federal student loans, Trump’s policy director Sam Clovis said in a May interview with Inside Higher Ed. The Republican Party platform also called for the federal government to stop originating student loans.
3. Students’ prospective future earnings could inform their ‘loan worthiness’
Trump also wants to let colleges have a say in lending decisions and make them share the risk of student borrowing with lenders, according to the Inside Higher Ed article. It would be up to the colleges and banks to decide together which students could borrow student loans, Clovis said. The decision would be based on factors including the student’s major, choice of college and the potential to find a job after graduating.
4. College costs could be reduced by limiting administrative ‘bloat’
Trump said in his October speech in Ohio that he would take steps to push colleges to cut tuition costs. If the federal government is going to subsidize student loans, he said, then colleges must be held accountable to invest in their students. If schools do not invest endowment money to reduce costs, Trump said the government may reconsider whether they deserve to keep those endowments tax-exempt.
5. You could use federal financial aid to cover nontraditional education programs
On his campaign website, Trump said he planned to “ensure that the opportunity to attend a two- or four-year college, or to pursue a trade or a skill set through vocational and technical education, will be easier to access, pay for and finish.”
What college students and loan borrowers can do now
Students seeking financial aid should fill out the Free Application for Federal Student Aid each year they’re in school. Submitting the FAFSA is required by those who want to be considered for grants, scholarships, work-study jobs and federal student loans.
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Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates
GAO-17-22: Published: Nov 15, 2016. Publicly Released: Nov 30, 2016.
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PODCAST: Student Loan Income-Driven Repayment Plans
Additional Materials:
- Highlights Page:
- Full Report:
Contact:
(617) 788-0534
emreyarrasm@gao.gov
Office of Public Affairs
(202) 512-4800
youngc1@gao.gov
What GAO Found
For the fiscal year 2017 budget, the U.S. Department of Education (Education) estimates that all federally issued Direct Loans in Income-Driven Repayment (IDR) plans will have government costs of $74 billion, higher than previous budget estimates. IDR plans are designed to help ease student debt burden by setting loan payments as a percentage of borrower income, extending repayment periods from the standard 10 years to up to 25 years, and forgiving remaining balances at the end of that period. While actual costs cannot be known until borrowers repay their loans, GAO found that current IDR plan budget estimates are more than double what was originally expected for loans made in fiscal years 2009 through 2016 (the only years for which original estimates are available). This growth is largely due to the rising volume of loans in IDR plans.
Estimated Costs of Direct Loans in Income-Driven Repayment Plans
Note: Due to the timing of the fiscal year 2017 budget, the amount of loans made to borrowers in fiscal years 2016 and 2017 are estimated.
Education’s approach to estimating IDR plan costs and quality control practices do not ensure reliable budget estimates. Weaknesses in this approach may cause costs to be over- or understated by billions of dollars. For instance:
Education assumes that borrowers’ incomes will not grow with inflation even though federal guidelines for estimating loan costs state that estimates should account for relevant economic factors. GAO tested this assumption by incorporating inflation into income forecasts, and found that estimated costs fell by over $17 billion.
Education also assumes no borrowers will switch into or out of IDR plans in the future despite participation growth that has led budget estimates to more than double from $25 to $53 billion for loans made in recent fiscal years. Predicting plan switching would be advisable per federal guidance on estimating loan costs. Education has begun developing a revised model with this capability, but this model is not complete and it is not yet clear when or how well it will reflect IDR plan participation trends.
Insufficient quality controls contributed to issues GAO identified. For instance:
Education tested only one assumption for reasonableness, and did so at the request of others, although such testing is recommended in federal guidance on estimating loan costs. Without further model testing, Education’s estimates may be based on unreasonable assumptions.
Due to growing IDR plan popularity, improving Education’s estimation approach is especially important. Until that happens, IDR plan budget estimates will remain in question, and Congress’s ability to make informed decisions may be affected.
Why GAO Did This Study
As of June 2016, 24 percent of Direct Loan borrowers repaying their loans (or 5.3 million borrowers) were doing so in IDR plans, compared to 10 percent in June 2013. Education expects these plans to have costs to the government. GAO was asked to review Education’s IDR plan budget estimates and estimation methodology.
This report examines: (1) current IDR plan budget estimates and how those estimates have changed over time, and (2) the extent to which Education’s approach to estimating costs and quality control practices help ensure reliable estimates. GAO analyzed published and unpublished budget data covering Direct Loans made from fiscal years 1995 through 2015 and estimated to be made in 2016 and 2017; analyzed and tested Education’s computer code used to estimate IDR plan costs; reviewed documentation related to Education’s estimation approach; and interviewed officials at Education and other federal agencies.
What GAO Recommends
GAO is making six recommendations to Education to improve the quality of its IDR plan budget estimates. These include adjusting borrower income forecasts for inflation, completing planned model revisions and ensuring that they generate reasonable predictions of participation trends, and testing key assumptions. Education generally agreed with GAO’s recommendations and noted actions it would take to address them.
For more information, contact Melissa Emrey-Arras at (617) 788-0534 or emreyarrasm@gao.gov.
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FEDERAL STUDENT LOANS:
Education Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options
GAO-15-663: Published: Aug 25, 2015. Publicly Released: Sep 17, 2015.
Multimedia:
- PODCAST: Student Loan Repayment Options
Additional Materials:
- Highlights Page:
- Full Report:
- Accessible Version:
Contact:
(617) 788-0534
emreyarrasm@gao.gov
Office of Public Affairs
(202) 512-4800
youngc1@gao.gov
What GAO Found
Many eligible borrowers do not participate in the Department of Education’s (Education) Income-Based Repayment and Pay As You Earn repayment plans for Direct Loans, and Education has not provided information about the plans to all borrowers in repayment. These plans provide eligible borrowers with lower payments based on income and set timelines for forgiveness of any remaining loan balances. While the Department of the Treasury estimated that 51 percent of Direct Loan borrowers were eligible for Income-Based Repayment as of September 2012, the most recent available estimate, Education data show 13 percent were participating as of September 2014. An additional 2 percent were in Pay As You Earn. Moreover, Education has reported ongoing concerns regarding borrowers’ awareness of these plans. Although Education has a strategic goal to provide superior information and service to borrowers, the agency has not consistently notified borrowers who have entered repayment about the plans. As a result, borrowers who could benefit from the plans may miss the chance to lower their payments and reduce the risk of defaulting on their loans.
Repayment Plan Participation of Direct Loan Borrowers in Active Repayment, September 2014
Few borrowers who may be employed in public service have had their employment and loans certified for the Public Service Loan Forgiveness program, and Education has not assessed its efforts to increase borrower awareness. Beginning in 2017, the program is to forgive remaining Direct Loan balances of eligible borrowers employed in public service for at least 10 years. As of September 2014, Education’s loan servicer for the program had certified employment and loans for fewer than 150,000 borrowers; however, borrowers may wait until 2017 to request certification. While the number of borrowers eligible for the program is unknown, if borrowers are employed in public service at a rate comparable to the U.S. workforce, about 4 million may be employed in public service. It is unclear whether borrowers who may be eligible for the program are aware of it. Although Education has a strategic goal to provide superior information and service to borrowers and provides information about Public Service Loan Forgiveness through its website and other means, it has not notified all borrowers in repayment about the program. In addition, Education has not examined borrower awareness of the program to determine how well its efforts are working. Borrowers who have not been notified about Public Service Loan Forgiveness may not benefit from the program when it becomes available in 2017, potentially forgoing thousands of dollars in loan forgiveness.
Why GAO Did This Study
As of September 2014, outstanding federal student loan debt exceeded $1 trillion, and about 14 percent of borrowers had defaulted on their loans within 3 years of entering repayment, according to Education data. GAO was asked to review options intended to help borrowers repay their loans.
For Direct Loan borrowers GAO examined: (1) how participation in Income-Based Repayment and Pay As You Earn compares to eligibility, and to what extent Education has taken steps to increase awareness of these plans, and (2) what is known about Public Service Loan Forgiveness certification and eligibility, and to what extent Education has taken steps to increase awareness of this program. GAO reviewed relevant federal laws, regulations, and guidance; September 2014 data from Education and its loan servicer for Public Service Loan Forgiveness; Treasury’s eligibility estimates; and 2012 employment data (most recent available) from the Bureau of Labor Statistics. GAO also interviewed officials from three loan servicers that service about half of Education’s loan recipients.
What GAO Recommends
GAO recommends Education consistently notify borrowers in repayment about income-driven repayment, and examine borrower awareness of Public Service Loan Forgiveness. Education generally agreed with GAO’s recommendations, but it believed the report overstated the extent to which borrowers lack awareness of income-driven repayment. GAO modified the report to clarify this issue.
For more information, contact Melissa Emrey-Arras at (617) 788-0534 or emreyarrasm@gao.gov.
