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.
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.”
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?Here are the top 6 lenders of 2018!
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1 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 2.47% APR (with Auto Pay) to 6.97% 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 Month/Day/Year, 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 08/21/18. 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 ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. 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. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
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.
3 Important Disclosures for SoFi.
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 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.57% – 6.97%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|