The share of federal student loan debt with relatively generous repayment options -- in income-driven repayment plans -- is growing rapidly, according to a new report from the Congressional Budget Office.
And the CBO, a nonpartisan agency, found that borrowers with graduate and professional degrees are benefiting most from the increasingly expensive federal program.
About 45 percent of the volume of federal loans was being repaid through income-driven plans in 2017, the report said, up from 12 percent in 2010. The share of undergraduate borrowers who enrolled in income-driven plans grew to 24 percent from 11 percent during this period. And the portion grew to 39 percent from 6 percent of borrowers who took out direct loans for graduate study.
Borrowers in income-driven repayment default on their loans at much lower rates, the CBO found. The federal government also spends much more on these loans -- it loses almost 17 cents on every dollar that goes into income-driven repayment while making nearly 13 cents on each dollar repaid through standard fixed-payment plans.
Graduate borrowers also tend to have larger balances, because their loans are not subject to annual or lifetime limits. More than half of the volume of federal loans (56 percent) held by graduate borrowers was in income-driven plans in 2017.
As a result, the CBO projected that government subsidies for graduate student loan borrowers will be substantially larger.
Among federal loans disbursed from 2020 to 2029, the report estimated that undergraduate borrowers would have $40 billion of their student debt forgiven. But the federal government would forgive $167 billion of graduate borrowers’ student loans, meaning that they would receive roughly 80 percent of that federal subsidy.
The CBO projected that graduate student borrowers in IDR would have an average of 56 percent of their loan balances forgiven, compared to 21 percent of the amount disbursed to undergraduates.
“Up until now, concerns about graduate students earning windfall benefits in the income-based repayment program were dismissed as hypothetical,” Jason Delisle, a resident fellow at the American Enterprise Institute, wrote in an opinion piece published today by Inside Higher Ed. “The CBO analysis puts those rebuttals to rest. Income-based repayment absolutely is providing the largest benefits to those who need them least.”
Jessica Thompson, associate vice president of the Institute for College Access and Success, said income-driven repayment is a “critical safety net” for borrowers. The CBO backs this up, she said, by finding that borrowers in IDR are half as likely as other borrowers to default on their loans.
Calls for Downsizing
Congress created the income-based repayment program in 2007, with backing from President George W. Bush's administration, to make student loan repayment more manageable and to provide financial relief for borrowers who were at risk of defaulting. The Obama administration later expanded the program.
Monthly payments are capped at 10 or 15 percent of borrowers’ discretionary incomes under the most popular IDR plans. And borrowers who have not paid off their loans within 20 or 25 years can have their outstanding balances forgiven. Those who qualify for the Public Service Loan Forgiveness program can have their loan balances eliminated in 10 years.
If current laws remain unchanged, the CBO estimated that $490 billion of the $1.05 trillion in federal student loans projected to be disbursed to students over the next decade would be repaid through income-driven plans. The total estimated federal subsidy for income-driven plans would be $83 billion. In contrast, the federal government would earn $72 billion on the $563 billion in loans it is projected to issue over the next decade that will be repaid through fixed-payment plans.
The government’s projected cost as a percentage of loan dollars, the so-called subsidy rate, would be 16.9 percent on average for income-driven plans and -12.8 percent on average for fixed-payment plans.
Borrowers in income-driven repayment tend to have larger loan balances. One reason, the CBO said, is the disproportionate share of graduate student borrowers who enroll in those plans. But these borrowers also may be more aware of their financial options, said the report.
The average loan balance of graduate borrowers in income-driven repayment was $92,000 in 2017, according to the CBO report. Undergraduate borrowers in those plans had an average loan balance of $25,100.
Government agencies have in the past raised alarms about the cost of IDR.
For example, the U.S. Government Accountability Office in 2016 faulted the Education Department for seriously underestimating the price tag for these programs. And the GAO last year said the feds should do more to verify borrowers’ income, arguing that about 76,000 borrowers who were making no monthly payments may have been earning enough to pay down some of their loans.
The new numbers from the Congressional Budget Office already began fueling calls by congressional Republicans to rein in income-driven repayment.
Senator Mike Enzi, a Republican from Wyoming who chairs the Senate Budget Committee, said the “explosive growth” of income-driven repayment plans was unsustainable for the federal government.
“Moreover, as this report finds, the significant majority of the benefits of these programs are going to forgive graduate student loans,” Enzi said in a written statement. “While higher education provides valuable opportunities, including increased earnings potential, it is crucial that lawmakers review these programs to ensure they are targeting limited federal resources appropriately and slowing the unsustainable growth in the cost of higher education.”
The CBO report considered options to change income-driven repayment by limiting the availability of those options or by adjusting how much borrowers would repay under those plans.
For example, delaying the forgiveness of student loans by five years would decrease the federal subsidy by more than $17 billion over the next decade.
The Trump administration has proposed scaling back IDR for graduate students, in part by extending their loan forgiveness period to 30 years, and redirecting those savings to undergraduates.
TICAS in a recent analysis pointed to bipartisan proposals to simplify and improve income-driven repayment, in part by insuring that borrowers always make payments based on their income and that married borrowers are treated consistently regardless of how they file taxes.