According to a report released by the Government Accountability Office (GAO), income-driven repayment plans will cost taxpayers $74 billion.
That’s nearly double what the Department of Education had estimated the income-driven repayment program would cost. In the coming years, the government will forgive a staggering $108 billion in student loans.
At a time when the country is facing $1.3 trillion in student loan debt, the massive expense of the income-driven repayment plan system is troubling.
What is an income-driven repayment plan?
If you have federal student loans and are struggling to keep up with your payments on your salary, you may qualify for an income-driven repayment (IDR) plan.
Depending on the specific income-driven repayment plan you enroll in, the government caps your monthly payments at 10 to 20 percent of your discretionary income. Your repayment term is also extended from 10 years to 20 or 25 years.
If you’re struggling to make your payments, you can use these plans as a short-term strategy until you make more money, or you can use them as a long-term option to pursue student loan forgiveness later on.
After 20 to 25 years of making qualifying payments, the government forgives the remaining balance of your loans, discharging your debt.
But keep in mind, not all borrowers get forgiveness; some borrowers do pay off their debts in full before that timeframe expires. If you do have a balance that the government forgives, the discharged amount is taxable as income in most cases.
How many of the loans will borrowers repay?
Approximately 25 percent of all borrowers of federal direct student loans are enrolled in an income-driven repayment plan.
Of the $352 billion of loans that are currently in an IDR plan or are eligible for an IDR plan, borrowers will repay only about 61 percent of those loans. The other 39 percent is likely to be forgiven or discharged by the government under the current structure.
That means the government will end up forgiving over $108 billion in student loans due to income-driven repayment plans, far beyond what anyone anticipated.
Why were the Education Department’s cost estimates so wrong?
The Department of Education was slammed by the GAO for seriously miscalculating its estimates and projections.
The GAO says the Department of Education did not take into account the rate of inflation on borrowers’ incomes. In addition, operating expenses cost $28 billion more than the Department of Education anticipated.
The GAO report further criticized the Education Department for not providing enough information about how they reached cost projections.
For the Education Department’s part, they say the massive growth of IDR and the increase in cost is due to a post-recession environment, where more people attended college and took advantage of expanded income-driven repayment programs.
There was a huge surge in school attendance which they had not accounted for and, they say, could not have anticipated.
In 2009, President Obama’s administration expanded income-driven repayment options to make managing student loan debt easier for new graduates in a tough economy, which had long-lasting consequences.
Will these findings change income-driven repayment programs?
While many politicians are angry about the surprise cost to taxpayers, it’s unlikely that income-driven repayment plans will be eliminated any time soon.
That said, with President-elect Donald Trump coming into office, there may be some changes to the plans as we know them. He has proposed radical changes to the current income-driven systems, which would expand income-driven repayment plans, not limit them.
What are other potential consequences?
Some analysts are wary that the GAO findings will give critics the fuel they need to introduce more privatization into the student loan market.
In an interview with Barron’s Next, Barclays analyst Mark DeVries said it could be the opportunity some have been looking for to limit government’s role.
“It’s going to give ammunition to those in Washington looking to shrink the government’s footprint in funding education,” says DeVries.
Private lenders like Sallie Mae could end up taking on a much larger role, even replacing some of the more generous federal options like federal Graduate PLUS loans.
What you can do
At this point, income-driven repayment plans are still a valid option for managing your federal student loans if you are struggling to make ends meet. IDR is available to you to take advantage of so you can find more breathing room in your budget.
One such income-driven plan is called the Income-Based Repayment program. To find out how much your payments could drop under the Income-Based Repayment program, check out the calculator below.
If you have run your numbers and it makes sense to you to pursue IDR, we can help you apply.
INCOME BASED REPAYMENT (IBR) CALCULATOR
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1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.50% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
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3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.49% effective March 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.50% – 7.27%1||Undergrad & Graduate|
|2.50% – 7.12%3||Undergrad & Graduate|
|2.53% – 8.79%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.55% – 7.12%5||Undergrad & Graduate|
|3.00% – 9.74%6||Undergrad & Graduate|