Tuesday 17th July 2018

FEDERAL STUDENT LOAN Forgiveness Options

Student Loan Forgiveness Is Set to Cost Taxpayers Billions More Than Expected

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The federal government is on pace to forgive at least $108 billion of student loans, according to a Government Accountability Office study published Wednesday that analyzed the cost of increasingly popular income-driven repayment plans.

That sum is more than double the U.S. Education Department’s current estimate for the cost of such income-driven repayment plans — an umbrella term for the five repayment plans that base payments on a borrowers’ earnings — and roughly four times the department’s original estimates, the report found.

Why You Should Think Carefully Before Refinancing Your Student Loans
Author Harold Pollack gives some useful tips on managing college debt.

Income-driven plans, which are designed to reduce loan bills to a manageable percentage of monthly income, can be a huge help to struggling college graduates. But some policy experts have raised concerns about the cost of the programs — particularly given the large number of borrowers with graduate school debt who qualify for the programs despite earning high salaries. A key issue: The education department doesn’t break out numbers for different plans, so it’s hard for analysts to calculate how much this latter group is costing the federal government.

Soaring Participation

Current versions of income-based repayment were developed during George W. Bush’s administration, but the Obama administration increased the number of plans and expanded the scope of who qualifies. As a result, enrollment in income-driven plans has grown massively in the past few years.

As of the end of June, the outstanding balance in income-driven repayment plans was $269 billion, or 40% of the federal government’s total portfolio of loans made directly — and the number of borrowers in these plans had doubled to 5.3 million in just two years.

The GAO’s analysis assumed that 61% of the total $352 billion in loans in income-based repayment programs would eventually will be repaid — leaving another $108 billion to be forgiven. (Another relatively small share will be discharged because of death or disability.)

5 Ways President Trump Could Affect Your Student Loans

11/21/2016 01:21 pm ET | Updated 1 day ago

President-elect Donald Trump has plans to address college affordability and student debt, though many details remain to be worked out. In an Oct. 13 speech in Columbus, Ohio, Trump outlined the basics of his views on student debt, tuition rates, administrative “bloat,” income-based repayment and loan forgiveness.

“Students should not be asked to pay more on their loans than they can afford,” Trump said. “The debt should not be an albatross around their necks for the rest of their lives.”

Trump and the Republican Party didn’t emphasize higher education in their campaign platforms, leaving experts puzzled as to what policies a Trump administration might pursue.

“We won’t know what priorities, if any, the administration has until we see what staff is in and what ideas they put out there,” says Matthew Chingos, senior fellow at the Washington think tank Urban Institute.

Some changes to the federal student loan system can be enacted by executive action, but others require congressional action. Here’s what we may be able to expect:

1. Income-driven repayment changes are likely

Under Trump’s proposed student loan program, he would cap repayment at 12.5% of a borrower’s income. He did not indicate if this repayment cap would apply to all federal loan borrowers or only for those who apply for income-driven repayment, as is the case now. In the most widely available income-driven repayment plan currently available to student loan borrowers, known as Revised Pay As You Earn, or REPAYE, monthly payments are capped at 10% of a borrower’s discretionary income.

Trump’s proposal would also forgive student loan debt after 15 years of full payments — five years earlier than the current REPAYE option — though it isn’t clear whether this applies only to income-driven repayment plans.

Jason Delisle, resident fellow at the American Enterprise Institute, says shortening the forgiveness timeline by five years could result in a net increase in the cost of the program for taxpayers.

2. Private banks — not the government — might issue federal student loans

Trump wants to restore a system in which private banks issue federal student loans, Trump’s policy director Sam Clovis said in a May interview with Inside Higher Ed. The Republican Party platform also called for the federal government to stop originating student loans.

Private banks used to issue federally backed student loans until 2010, when the federal government revamped the program and began originating all federal student loans through its Direct Loan program. The Obama administration cited billions of dollars in cost savings as a reason for the switch, and used the savings to offer more Pell Grants for low-income students. Today, most new student borrowing comes from federal direct loans, with private lenders servicing the government-issued loans.

3. Students’ prospective future earnings could inform their ‘loan worthiness’

Trump also wants to let colleges have a say in lending decisions and make them share the risk of student borrowing with lenders, according to the Inside Higher Ed article. It would be up to the colleges and banks to decide together which students could borrow student loans, Clovis said. The decision would be based on factors including the student’s major, choice of college and the potential to find a job after graduating.

For example, students pursuing majors with high post-college employment rates, such as engineering and health care, might be approved to take on more student debt than those studying liberal arts topics. Today, any student — regardless of his or her planned major — can borrow the same amount of federal student loans each year.

The idea that colleges should have “skin in the game” by taking responsibility for student outcomes has bipartisan support. For example, Sen. Jack Reed, D-R.I., introduced a bill in 2015 that would require colleges that accept federal financial aid to share student loan risk with the Department of Education. Chingos says risk-sharing for institutions may also threaten the for-profit college industry, but it’s unclear whether the Trump administration would be sympathetic to for-profit schools.

4. College costs could be reduced by limiting administrative ‘bloat’

Trump said in his October speech in Ohio that he would take steps to push colleges to cut tuition costs. If the federal government is going to subsidize student loans, he said, then colleges must be held accountable to invest in their students. If schools do not invest endowment money to reduce costs, Trump said the government may reconsider whether they deserve to keep those endowments tax-exempt.

“We have a lot of power over the college, and they’re not doing the job of cost cutting because they don’t have the incentive cost to cut it because you’re paying for it,” he said in the speech.

Trump also said in his Ohio speech that he plans to reduce the “tremendous bloat” in college administration. By reducing unnecessary costs of compliance with federal regulations, he said, colleges would be able to pass the savings on to students in the form of lower tuition.

5. You could use federal financial aid to cover nontraditional education programs

On his campaign website, Trump said he planned to “ensure that the opportunity to attend a two- or four-year college, or to pursue a trade or a skill set through vocational and technical education, will be easier to access, pay for and finish.”

Higher-education programs’ accreditation “should be decoupled from federal financing,” the Republican Party platform said. That may mean that students attending those nontraditional programs could be allowed to pay for the courses with federal financial aid. Currently, only students attending schools that are accredited through the Department of Education can qualify for federal financial aid.

After Trump’s speech in Ohio, his campaign did not release a more comprehensive higher education plan on its website.

What college students and loan borrowers can do now

Students seeking financial aid should fill out the Free Application for Federal Student Aid each year they’re in school. Submitting the FAFSA is required by those who want to be considered for grants, scholarships, work-study jobs and federal student loans.

Borrowers with existing student loan debt have several options for managing it, including income-driven repayment plans, federal forgiveness programs and student loan refinancing.

A previous version of this article didn’t state that some changes to the student loan system could be made by executive action. This article has been corrected.

Anna Helhoski, Brianna McGurran and Teddy Nykiel are staff writers at NerdWallet, a personal finance website. Email anna@nerdwallet.com or bmcgurran@nerdwallet.com or teddy@nerdwallet.com. Twitter: @AnnaHelhoski  or @briannamcscribe or @teddynykiel.

Updated Nov. 29, 2016.

This article was originally published on NerdWallet.


Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates

GAO-17-22: Published: Nov 15, 2016. Publicly Released: Nov 30, 2016.


    PODCAST: Student Loan Income-Driven Repayment Plans


Additional Materials:


Melissa Emrey-Arras
(617) 788-0534

Office of Public Affairs
(202) 512-4800

What GAO Found

For the fiscal year 2017 budget, the U.S. Department of Education (Education) estimates that all federally issued Direct Loans in Income-Driven Repayment (IDR) plans will have government costs of $74 billion, higher than previous budget estimates. IDR plans are designed to help ease student debt burden by setting loan payments as a percentage of borrower income, extending repayment periods from the standard 10 years to up to 25 years, and forgiving remaining balances at the end of that period. While actual costs cannot be known until borrowers repay their loans, GAO found that current IDR plan budget estimates are more than double what was originally expected for loans made in fiscal years 2009 through 2016 (the only years for which original estimates are available). This growth is largely due to the rising volume of loans in IDR plans.

Estimated Costs of Direct Loans in Income-Driven Repayment Plans

Estimated Costs of Direct Loans in Income-Driven Repayment Plans

Note: Due to the timing of the fiscal year 2017 budget, the amount of loans made to borrowers in fiscal years 2016 and 2017 are estimated.

Education’s approach to estimating IDR plan costs and quality control practices do not ensure reliable budget estimates. Weaknesses in this approach may cause costs to be over- or understated by billions of dollars. For instance:

Education assumes that borrowers’ incomes will not grow with inflation even though federal guidelines for estimating loan costs state that estimates should account for relevant economic factors. GAO tested this assumption by incorporating inflation into income forecasts, and found that estimated costs fell by over $17 billion.

Education also assumes no borrowers will switch into or out of IDR plans in the future despite participation growth that has led budget estimates to more than double from $25 to $53 billion for loans made in recent fiscal years. Predicting plan switching would be advisable per federal guidance on estimating loan costs. Education has begun developing a revised model with this capability, but this model is not complete and it is not yet clear when or how well it will reflect IDR plan participation trends.

Insufficient quality controls contributed to issues GAO identified. For instance:

Education tested only one assumption for reasonableness, and did so at the request of others, although such testing is recommended in federal guidance on estimating loan costs. Without further model testing, Education’s estimates may be based on unreasonable assumptions.

Due to growing IDR plan popularity, improving Education’s estimation approach is especially important. Until that happens, IDR plan budget estimates will remain in question, and Congress’s ability to make informed decisions may be affected.

Why GAO Did This Study

As of June 2016, 24 percent of Direct Loan borrowers repaying their loans (or 5.3 million borrowers) were doing so in IDR plans, compared to 10 percent in June 2013. Education expects these plans to have costs to the government. GAO was asked to review Education’s IDR plan budget estimates and estimation methodology.

This report examines: (1) current IDR plan budget estimates and how those estimates have changed over time, and (2) the extent to which Education’s approach to estimating costs and quality control practices help ensure reliable estimates. GAO analyzed published and unpublished budget data covering Direct Loans made from fiscal years 1995 through 2015 and estimated to be made in 2016 and 2017; analyzed and tested Education’s computer code used to estimate IDR plan costs; reviewed documentation related to Education’s estimation approach; and interviewed officials at Education and other federal agencies.

What GAO Recommends

GAO is making six recommendations to Education to improve the quality of its IDR plan budget estimates. These include adjusting borrower income forecasts for inflation, completing planned model revisions and ensuring that they generate reasonable predictions of participation trends, and testing key assumptions. Education generally agreed with GAO’s recommendations and noted actions it would take to address them.

For more information, contact Melissa Emrey-Arras at (617) 788-0534 or emreyarrasm@gao.gov.



Education Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options


GAO-15-663: Published: Aug 25, 2015. Publicly Released: Sep 17, 2015.


  • PODCAST: Student Loan Repayment Options


Additional Materials:


Melissa Emrey-Arras
(617) 788-0534

Office of Public Affairs
(202) 512-4800

What GAO Found

Many eligible borrowers do not participate in the Department of Education’s (Education) Income-Based Repayment and Pay As You Earn repayment plans for Direct Loans, and Education has not provided information about the plans to all borrowers in repayment. These plans provide eligible borrowers with lower payments based on income and set timelines for forgiveness of any remaining loan balances. While the Department of the Treasury estimated that 51 percent of Direct Loan borrowers were eligible for Income-Based Repayment as of September 2012, the most recent available estimate, Education data show 13 percent were participating as of September 2014. An additional 2 percent were in Pay As You Earn. Moreover, Education has reported ongoing concerns regarding borrowers’ awareness of these plans. Although Education has a strategic goal to provide superior information and service to borrowers, the agency has not consistently notified borrowers who have entered repayment about the plans. As a result, borrowers who could benefit from the plans may miss the chance to lower their payments and reduce the risk of defaulting on their loans.

Repayment Plan Participation of Direct Loan Borrowers in Active Repayment, September 2014

Repayment Plan Participation of Direct Loan Borrowers in Active Repayment, September 2014

Few borrowers who may be employed in public service have had their employment and loans certified for the Public Service Loan Forgiveness program, and Education has not assessed its efforts to increase borrower awareness. Beginning in 2017, the program is to forgive remaining Direct Loan balances of eligible borrowers employed in public service for at least 10 years. As of September 2014, Education’s loan servicer for the program had certified employment and loans for fewer than 150,000 borrowers; however, borrowers may wait until 2017 to request certification. While the number of borrowers eligible for the program is unknown, if borrowers are employed in public service at a rate comparable to the U.S. workforce, about 4 million may be employed in public service. It is unclear whether borrowers who may be eligible for the program are aware of it. Although Education has a strategic goal to provide superior information and service to borrowers and provides information about Public Service Loan Forgiveness through its website and other means, it has not notified all borrowers in repayment about the program. In addition, Education has not examined borrower awareness of the program to determine how well its efforts are working. Borrowers who have not been notified about Public Service Loan Forgiveness may not benefit from the program when it becomes available in 2017, potentially forgoing thousands of dollars in loan forgiveness.

Why GAO Did This Study

As of September 2014, outstanding federal student loan debt exceeded $1 trillion, and about 14 percent of borrowers had defaulted on their loans within 3 years of entering repayment, according to Education data. GAO was asked to review options intended to help borrowers repay their loans.

For Direct Loan borrowers GAO examined: (1) how participation in Income-Based Repayment and Pay As You Earn compares to eligibility, and to what extent Education has taken steps to increase awareness of these plans, and (2) what is known about Public Service Loan Forgiveness certification and eligibility, and to what extent Education has taken steps to increase awareness of this program. GAO reviewed relevant federal laws, regulations, and guidance; September 2014 data from Education and its loan servicer for Public Service Loan Forgiveness; Treasury’s eligibility estimates; and 2012 employment data (most recent available) from the Bureau of Labor Statistics. GAO also interviewed officials from three loan servicers that service about half of Education’s loan recipients.

What GAO Recommends

GAO recommends Education consistently notify borrowers in repayment about income-driven repayment, and examine borrower awareness of Public Service Loan Forgiveness. Education generally agreed with GAO’s recommendations, but it believed the report overstated the extent to which borrowers lack awareness of income-driven repayment. GAO modified the report to clarify this issue.

For more information, contact Melissa Emrey-Arras at (617) 788-0534 or emreyarrasm@gao.gov.

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