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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