Income-Based Repayment Costs Rising

Budget documents show Obama's planned expansion of his Pay As You Earn plan will add $9 billion to already-rising long-term cost of federal student loans.

February 6, 2015

WASHINGTON -- The Obama administration revealed this week that extending its income-based repayment program to 5 million existing student loan borrowers will cost taxpayers more than $9 billion.

The price tag for the expansion of the Pay As You Earn program had not previously been made public but was included as part of the administration’s annual budget. It came as the U.S. Department of Education also raised its estimate of the long-term cost to the government of all federal direct loans.

The upward projection of $21 billion for all direct loan programs was primarily the result of more borrowers enrolling across all of the federal government’s various repayment plans that tie monthly payments to a borrower’s income and forgive outstanding debt after 10 to 25 years.

Enrollment in those income-based plans has surged over the past years, as the Obama administration and consumer advocates have actively marketed the programs to borrowers who are struggling to make payments. The number of people enrolled in the programs gone up by more than half over the past several years.

The department’s annual recalibrations of the cost of student loans are based on changing economic assumptions, loan performance and other technical factors. The estimates can fluctuate widely from year to year.

Last year, for instance, the Department of Education reported that the long-term costs of outstanding student loans had increased by $6 billion. But the department’s forecast the previous year had gone in the other direction, projecting new savings of $8.1 billion.

Jason Delisle, director of the Federal Education Budget Project at New America, said it’s difficult to draw any firm conclusions about the costs of student loans from any one year’s estimate. “I don’t really put that much stock in the yearly calculation because it changes so much from year to year,” he said.

What is clear from the budget projections, though, is that the federal government’s income-based repayment programs collectively are operating at a cost to taxpayers. Although the revenue or costs associated with the federal government’s different types of loans vary widely in the standard or extended repayment programs, every single loan dollar currently in an income-driven repayment program operates at a cost to the government, budget documents show.

Some advocates for income-based repayment argue that even if the income-based programs make student loans more costly for the government, the program is still on track to generate profits, according to the Congressional Budget Office.

Lauren Asher, the president of the Institute for College Access and Success, which has been a staunch advocate for income-based repayment programs, said that the estimated cost projections tell only part of the story.

"It's important to look at these numbers even in the context of the fact that the loan programs are projected to make tens of billions in profits in the near future and over the next decade," Asher said. "The availability of income-driven repayment plans is really essentially for borrowers who are increasingly facing difficulty repaying their loans.”


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