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 8 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
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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 3.20% APR (with Auto Pay) to 6.99% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.89% 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 December 13, 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 12/13/2019. 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 firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for SoFi.
3 Important Disclosures for Figure.
Figure’s Student Refinance Loan is a private loan. If you refinance federal loans, you forfeit certain flexible repayment options associated with those loans. If you expect to incur financial hardship that would impact your ability to repay, you should consider federal consolidation alternatives.
4 Important Disclosures for College Ave.
College Ave Disclosures
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
1College Ave Refi Education loans are not currently available to residents of Maine.
2All rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.
4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 1/1/2020. Variable interest rates may increase after consummation.
5 Important Disclosures for Laurel Road.
Laurel Road Disclosures
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. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
ANNUAL PERCENTAGE RATE (“APR”)
There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.
For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
ELIGIBILITY & ELIGIBLE LOANS
Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).
Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.
All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.
For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.
The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.
The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.
POSTPONING OR REDUCING PAYMENTS
After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship.
We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.
We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.
If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of November 8, 2019 and is subject to change.
6 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers.
7 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 1.76% effective November 10, 2019.
8 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.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 12/019/2019 student loan refinancing rates range from 1.90% to 8.59% Variable APR with AutoPay and 3.49% to 7.75% Fixed APR with AutoPay.
|1.99% – 6.89%1||Undergrad & Graduate|
|2.31% – 7.36%2||Undergrad & Graduate|
|2.06% – 6.81%3||Undergrad & Graduate|
|2.62% – 6.12%4||Undergrad & Graduate|
|2.29% – 6.65%5||Undergrad & Graduate|
|1.99% – 7.06%6||Undergrad & Graduate|
|1.81% – 6.29%7||Undergrad & Graduate|
|1.90% – 8.59%8||Undergrad & Graduate|