America’s student debt load has grown into a $1.3 trillion headache, but the migraine appears to worsening.
With more borrowers struggling to handle their loan repayments, the U.S. government created a system that rejiggers their debt according to their income levels, called income-driven repayment. After repaying the new amount for up to 25 years, the borrower’s debt is then forgiven. The problem, according to a new report from the Government Accountability Office, is that the U.S. Department of Education (DOE) provided wildly unreliable estimates of the program’s costs.
As a result, over the next few years the federal government is likely to forgive up to $108 billion in student loans, according to the GAO, which analyzes issues for Congress. The agency also said the DOE underestimated the federal cost of the income-driven repayment plans, which it said had almost doubled from $25 billion to $53 billion for student loans issued between 2009 to 2016 alone because of the growing volume of loans that are entering the repayment plans.
“At a time when our nation is facing a mammoth national debt, the Department of Education has expanded a student loan program that will cost twice as much as originally estimated,” said Senator Mike Enzi (R-Wyoming), chairman of the Senate Budget Committee, in a statement. Enzi had requested the report from the GAO.
He also claims that the Obama administration had been “manipulating the terms of the student loan program without the consent of Congress, while shirking its statutory duty to carefully assess the cost impact of those changes.”
Income-based repayment preceded the current administration, but it was expanded under President Obama as student debt loads continued to mushroom, putting a strain on the ability of some Americans to buy homes and manage their budgets. Under Obama, some borrowers received an even bigger break than those who were the first to enroll in the programs. For instance, income-eligible borrowers who took out loans after July 2014 could cap their payments at 10 percent of discretionary income, compared with 15 percent for loans issued prior to that date.
While that might seem like a boondoggle to some voters, the plans were designed with the idea that even a lower repayment amount would be better for taxpayers than if those borrowers defaulted. To that end, the plans appeared to work, with the GAO noting that fewer than 1 percent of borrowers who entered two of the income-driven repayment programs defaulted, compared with 14 percent of borrowers who hadn’t amended their repayments based on income.
So where did the education agency go wrong, according to the GAO? First, the DOE assumed that borrowers wouldn’t either switch into or out of the income-driven repayment plans. That may seem hard to believe, given that college tuition continues to rise, adding to the debt burden of recent graduates and providing incentives for many to enter the income-based repayment plans. The GAO also faulted the education department for that assumption, as well as several others.
“Education’s approach to estimating IDR plan costs and quality control practices do not ensure reliable budget estimates,” the report said. “Weaknesses in this approach may cause costs to be over- or understated by billions of dollars.”
The percent of direct loan dollars that are now repaid through income-based plans have doubled in the last three years alone, the GAO said. Nevertheless, many borrowers who could benefit from the plans -- such as extremely low-income workers -- may not even be aware of the plans, the report noted.
The GAO report also called out the education department’s assumption that borrowers’ incomes won’t grow with inflation, which it said would lower estimated costs by $17 billion.
At this point, it’s likely that $137 billion of the roughly $352 billion owed through income-driven repayment plans won’t be repaid, with about $108 billion wiped away through loan forgiveness, the GAO said. Another $29 billion will be discharged, it said.
It’s unclear how President-elect Donald Trump might treat income-based repayment plans, given that he vowed to set payments at 12.5 percent of income while also suggesting he might eliminate the federal government’s role in lending to students. “It’s terrible that one of the only profit centers we have is student loans,” Trump said last year.
Yet the GAO report suggests that the student loan business might not be the profit center the education department had hoped.