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.
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.
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.)
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.
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 email@example.com or firstname.lastname@example.org or email@example.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.
FEDERAL STUDENT LOANS:
Education Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options