A government program that allows student loan borrowers to significantly reduce their monthly payments is growing in popularity—and increasingly eating into federal coffers.
The U.S. Department of Education is sticking to the rosier news in a brief report released this week that shows the number of U.S. student-loan holders enrolled in income-based repayment plans has jumped by more than 50 percent since last year. According to the government, 3.9 million borrowers have signed up for income-based repayment plans as of this June.
But while these programs, which have existed in some form since 1994 but were supercharged only in the past few years, can cut monthly loan payments by hundreds of dollars for individual borrowers, their cost to taxpayers overall is rising fast.
There are several versions of income-based repayment, some more affordable than others. But most function like this: Borrowers whose incomes don't exceed a certain threshold relative to their debt repay a smaller portion of the monthly payment they would otherwise be required to submit. Depending on the program, the qualified borrower pays either 10 or 15 percent of his or her income over a duration of 20 or 25 years (10 years if the borrower spends that entire time employed at a government or nonprofit position). Any amount not paid off after those periods is excused, a perk that can translate into hundreds of thousands of dollars for borrowers with high student-debt loads.
Critics of income-based repayment programs charge that they do a poor job of managing the expenses the federal government must absorb in the event students don't fully repay their original loan amounts. And that's a real concern given that borrowers who attended graduate programs also are eligible for income-based repayment. While the federal government places borrowing limits on the federal loans undergraduate students can take out— $57,500 if the student has an independent tax status, and $31,000 if the student is considered a dependent—the only stipulation for graduate students is that they take out no more than the cost of attendance, which in addition to tuition includes living expenses. The result is that the borrowers who likely need debt relief the least—graduate students, who on average earn far more than even bachelor's degree holders—can look forward to the most generous debt relief through income-based repayment programs.
The Wall Street Journal reported yesterday that graduate-school loans account for 40 percent of the entire $1.2 trillion student debt pie, even though just 14 percent of borrowers attended a graduate school program. In the past decade, the percentage of borrowers with debts exceeding $100,000 has quintupled to nearly 2 million borrowers, the Journal notes.
Already more than $200 billion in loans are signed up through income-based repayment programs, according to a Bloomberg Business article that ran in early August, which appears to be a big change from a year and a half ago, when 1.3 million borrowers were enrolled in the programs. The most recent DOE data shows there are 41 million borrowers overall in the United States repaying their public student loans.
The uptick in borrowers with repayment plans pegged to their incomes is one of the reasons the Congressional Budget Office in January and March estimated that student-loan debt will cost taxpayers an additional $66 billion in the period between 2015 and 2024. Given the income the government generates from various other federal student loan programs, it claims taxpayers still come out ahead in servicing student loans, particularly graduate student loans and those taken out by parents for their kids (though there's a fierce debate over whether the government calculates its student debt revenue accurately).
Jason Delisle, an education analyst at the New America think-tank calculated that income-based repayment programs are costing taxpayers $11 billion a year. Federal-budget followers warn that as more colleges wise up to income-based programs and their potential for debt forgiveness, they could charge higher tuition and encourage students to assume the costs, with Uncle Sam swallowing their debt loads. Anecdotally, there's precedent for this worry: In 2013, Delisle and colleagues wrote about an administrator at Georgetown University's law school encouraging students to take out large amounts of debt that'd be excused after 10 years as part of the income-based repayment program's public-service provision.
Already, roughly half of current income-based repayment participants are former graduate-school students. "It makes sense. If you have a low loan balance, you can't even use [income-based repayment] because it won't lower your monthly payment," Delisle said. For borrowers with graduate-school loans, the stakes are higher. "They enroll because they need it," he said.
Various think-tanks and the Obama administration are proposing to close some of the loopholes that allow borrowers with graduate-school loan debt to forgo paying large chunks of what they owe. A recent rule released by the administration would extend the loan-repayment period from 20 years to 25 years for some graduate-school borrowers, but also forgive some portion of the unpaid interest each month. In other words, the rule packs in a new restriction and benefit at the same time.
"We have a federal program that will provide a $150,000 of loan forgiveness to someone who graduates from Georgetown Law, but a poor kid who wants to go to Georgetown undergrad can only get $5,000 a year," Delisle said. "I would struggle to find a more regressive federal education policy," he added.
Still, while much attention is being paid to wealthier borrowers, many students who could benefit from the financial cushion income-based repayment plans provide are struggling to sign up for them.The Consumer Financial Protection Bureau points to the complexity of the initial application process and the fact that borrowers must reapply each year as chief hurdles students face in taking advantage of income-based repayment programs.
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