Are Income-Driven Repayment Programs Putting Federal Student Loans at Risk?

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Federal student loans are costing the government billions of dollars, according to a recent report from the Office of the Inspector General at the Department of Education.

The report states that the biggest culprit is the growing number of borrowers who enroll in income-driven repayment programs (IDR). These programs allow students to extend their student loan terms and make monthly payments based on how much money they make.

This report follows one from the Government Accountability Office (GAO) in 2016 indicating that the federal government drastically underestimated the cost of income-driven repayment.

It is likely that this new report from the Office of the Inspector General will influence the outcome of the PROSPER Act legislation currently working its way through Congress.

Income-driven repayment programs cost the government $11.5 billion in 2015

According to the Office of the Inspector General, the government subsidy for income-based repayment plans such as Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAYE), rose from $1.4 billion in 2011 to $11.5 billion in 2015.

income-driven repayment programs

Image credit: Office of the Inspector General, U.S. Department of Education

The above figure shows that the government has been making money on all other federal student loans. However, when it comes to income-driven repayment programs, the government is losing money. The red line indicates the total — and the trend appears to be moving in a direction where the money repaid by borrowers will no longer offset the cost of student loan forgiveness.

“Borrowers have been signing up for IDR plans, such as PAYE and REPAYE, at a substantial rate,” said the report. “We calculated that the portion of total Direct Loan volume being repaid through IDR plans has increased 625% [from 2011 to 2015].”

The Office of Federal Student Aid (FSA) is also recognized in the report. “As more borrowers select IDR plans that allow for student loan forgiveness, the cost of this form of nonpayment could be a major issue for the federal government.”

On top of that, FSA expressed concern that uncertain repayment terms related to timing and the potential for more forgiveness could create challenges to managing the government’s student loan portfolio.

A similar report from the GAO in late 2016 took the Department of Education to task for severely underestimating the cost of income-driven repayment programs and Public Service Loan Forgiveness (PSLF). That report found that close to one-third of federal student loans expected to go through IDR would be forgiven, at the cost of $74 billion for student loans issued between 2009 and 2016.

What does the Office of Inspector General recommend?

To help alleviate this problem, the Office of Inspector General suggests that the Department of Education take the time to publish more information about the costs. The GAO already asked the Department of Education to improve the way it estimates the impacts of policies.

“[I]t is imperative that the department publish additional information on both historical and future estimated costs and the associated assumptions, methodologies, and limitations of the information,” said the report, giving the Department of Education 30 days to submit an action plan to correct the situation.

The Obama administration pushed for increased publicity for income-driven repayment programs as a way to help low-income students better manage their cash flow. However, even with that push, in May 2017, the Consumer Financial Protection Bureau published findings indicating that many servicers aren’t providing information about IDR options and that some borrowers find it difficult to enroll.

How could the PROSPER Act impact the growing cost of income-driven repayment programs?

While the Department of Education looks at its methodology and attempts to find a solution to its federal student loans portfolio woes, Congress may already be taking steps to solve the problem, courtesy of legislation wending its way through the House and the Senate.

In December, the House introduced the PROSPER Act, and the Senate has been holding hearings about the legislation.

If passed, the PROSPER Act would streamline the repayment program to include a standard 10-year plan and a single income-based repayment program. However, with the new plan, there would be a minimum payment of $25 and borrowers would pay 15% of their discretionary income.

This is a change from current programs that allow for no minimum payment if students have low enough incomes, as well as raising the cap from 10% of discretionary income.

On top of that, the PROSPER Act reduces the loan amount eligible for forgiveness. Borrowers would be required to pay whatever they would have under a 10-year plan, getting rid of any forgiveness for principal loan amounts. There would be forgiveness of any interest that accumulates beyond the interest a borrower would have paid in a standard plan, though.

However, the reduction in the amounts forgiven could help stem the tide of growing costs to the federal government.

“One of the strongest policy reforms in the PROSPER Act is the elimination of loan forgiveness,” said the right-leaning Heritage Foundation. “Ending this policy would come as welcome news to American workers, the majority of whom do not hold bachelor’s degrees and will currently have to pay this massive bill along with any new loan forgiveness.”

The left-leaning Center for American Progress, however, worries the PROSPER Act could hit low-income graduates hard — and even cost them more in the long run.

federal student loans

Image credit: The Center for American Progress

Additionally, the PROSPER Act has no upper limit on the repayment term. Even though excess interest would be forgiven, the fact that the original amount borrowed must be repaid means that some borrowers could continue paying for 60 years, according to the analysis.

“While the desire to reduce complexity for borrowers is laudable, the PROSPER Act would do more than good,” said the Center for American Progress. “The repayment restructuring would increase monthly payments for all borrowers, increase the amount many borrowers will pay overall, and increase the time they will spending doing it.”

What can you do about your student loan situation?

Since their introduction, income-driven repayment programs have provided a way for borrowers to stay current on their payments without breaking their budgets. For now, IDR makes sense when you need increased monthly cash flow.

However, long-term, it’s possible that you could end up paying more than you borrow, depending on how long you are in repayment. The longer you pay interest, the more it will cost you. Plus, current IDR solutions can potentially result in a hefty tax bill after your remaining balance is forgiven 20 or 25 years down the road.

For many borrowers, especially those who don’t qualify for PSLF, it might be a good idea to find ways to pay down debt faster. As your income increases, consider making larger payments, or even refinancing to a lower interest rate and term, to help you get rid of your debt ahead of time — and pay less doing it.

Interested in refinancing student loans?

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1 Important Disclosures for Laurel Road.

Laurel Road Disclosures

  1. VARIABLE APR – APR is subject to increase after consummation. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes.

2 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student Loan RefinanceFixed rates from 3.999% APR to 7.804% APR (with AutoPay). Variable rates from 2.480% APR to 7.524% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.480% APR assumes current 1 month LIBOR rate of 2.07% plus 0.91% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

3 Important Disclosures for CommonBond.

CommonBond Disclosures

  1. Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment, which is reflected in the interest rates and APRs displayed. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 2.08% effective July 25, 2018.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate DisclosureVariable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2018, the one-month LIBOR rate is 2.07%. Variable interest rates range from 2.72%-8.17% (2.72%-8.17% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.50%-8.69% (3.50% – 8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled, must be in repayment of their existing student loan(s) and must make the minimum number of payments after leaving school. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a co-signer who is a U.S. citizen or permanent resident. The co-signer (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a co-signer will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.
  7. Average savings based on 18,113 actual customers who refinanced their federal and private student loans through our Education Refinance Loan between January 1, 2017 and December 31, 2017. The calculation is derived by averaging the monthly savings of Education Refinance Loan customers whose payments decreased after refinancing, which is calculated by taking the monthly student loan payments prior to refinancing minus the monthly student loan payments after refinancing. The borrower’s savings might vary based on the interest rates, balances and remaining repayment term of the loans they are seeking to refinance. The borrower’s overall repayment amount may be higher than the loans they are refinancing even if their monthly payments are lower.
2.57% – 5.87%Undergrad
& Graduate
Visit Earnest
2.80% – 6.38%1Undergrad
& Graduate
Visit Laurel Road
2.48% – 7.52%2Undergrad
& Graduate
Visit SoFi
2.47% – 7.99%Undergrad
& Graduate
Visit Lendkey
2.57% – 6.65%3Undergrad
& Graduate
Visit CommonBond
2.72% – 8.17%4Undergrad
& Graduate
Visit Citizens
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.