Why taxpayers will cover $39 billion in student debt
At $1.2 trillion, America's student-debt load is considered at crisis levels, stymying some young grads from buying their first homes or cars as they struggle with juggling repayment with other living expenses.
Yet for some grads, there's a way to find relief: plans that peg repayment to income. Grads who are living on a below-average salary or are on a fixed income can apply for these plans, which provide debt forgiveness after two decades. For students in low-income majors such as social work and early education, this option can be a godsend.
While it's good news for workers who qualify, these income-driven repayment plans have a downside, and it comes at the expense of American taxpayers. The plans will cost taxpayers an additional $39 billion over the next decade, according to an estimate from the Congressional Budget Office.
The CBO raised an earlier estimate because it expects more Americans to sign up for the income-pegged repayment options over the next several years. Because some debt is forgiven, the plans cost the taxpayers more than other repayment plans, according to the agency.
The plans aren't new -- they were introduced by President Bill Clinton -- but the Obama administration began promoting them in 2013, according to Bloomberg. Borrowers received emails telling them, "Your initial payment could be as low as $0 per month."
By contrast, traditional student-loan repayment plans are amortized over 10 years and aren't linked to income. The median monthly payment for households with student loan debt is about $242, according to a 2014 analysis from the Brookings Institution.
With income-based plans, repayment is typically between 10 percent to 15 percent of a worker's discretionary income. After paying back the loans for between 20 to 25 years, the balance is forgiven.
Take Laura Strong, a 29-year-old who has $245,000 in student loans for her psychology Ph.D. She told Bloomberg she hopes to earn about $35,000 this year in part-time jobs. Instead of paying back what would normally be monthly payments of $2,000, she's on the hook for only $100 a month, thanks to income-based repayment.
Obama has pushed the plans amid concern that the snowballing levels of student debt are hurting the economy. The administration wants to expand one of the programs, called the Pay as You Earn (PAYE) plan, by capping monthly repayments to 10 percent of income and forgiving the balance after 20 years. The Education Department is now accepting public comment on the proposal.
While it may be a godsend to overextended graduates, the income-based plans have raised concerns among some critics that they encourage students to take on too much debt, as well as indirectly encouraging universities to raise tuition.
The programs "may not only shift more risk from students to government, but also from institutions to government, thereby reducing institutional incentives to ensure that students complete programs and earn sufficient income to repay their loans," wrote George Washington University research professors Robert G. Sheets and Stephen Crawford in a research paper last year for Lumina Foundation, a private foundation.