Federal programs to help individuals cope with their college loans will cost the nation’s taxpayers at least $108 billion during the next few years, the Government Accountability Office (GAO) reports.
The $108 billion figure doesn’t include $39 billion in losses through loan discharges due to death or disability, and it applies only to loans made by the end of fiscal year 2017.
Taxpayers on Hook
Total student loan debt is now more than $1.2 trillion and exceeds credit card debt. The GAO reports the federal government holds $912 million of that debt. The rest is held by private companies, including those that issued loans before the federal government replaced its loan-guarantee program with direct loans.
The GAO report—provided to Congress in November at the request of U.S. Sen. Michael Enzi (R-WY), chairman of the Senate Budget Committee—examines the costs of income-driven repayment (IDR) plans and loan forgiveness programs. The report, titled “Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates,” criticizes the U.S. Department of Education for underestimating those costs.
“Education’s approach to estimating IDR plan costs has numerous weaknesses that may result in unreliable budget estimates,” writes the GAO. The report also states the estimates are rife with uncertainty because the newest forgiveness program will not go into effect until October 2017.
Although they vary, all IDR plans allow graduates to pay their debts with a percentage of their monthly income instead of the monthly amount they would pay under a plan that requires loans to be repaid over a 10-year period. Paying back student loans over 10 years is still an option for student loan borrowers, but it’s no longer required for those that qualify for IDR plans.
Depending on the plan, graduates can reduce their payments to between 10 and 20 percent of their discretionary income. (Discretionary income is the amount of a graduate’s income above 150 percent of the poverty level.) After 20 or 25 years, the loan is forgiven if it is not paid. By that time, however, some graduates will have paid more than if they had not taken a repayment plan, because interest will still accrue.
The Public Service Forgiveness Loan (PSLF) plan allows students who work in government or nonprofit organizations to obtain forgiveness of their loans after 10 years. An example the GAO gives is a graduate owing $60,000 who, under the standard repayment plan, would pay $82,000 over 10 years ($22,000 in interest). An income-repayment plan plus the forgiveness program could reduce that figure to $46,684.
Participation in these programs has been growing rapidly. As recently as June 2013, just 10 percent of graduates with federal loans were using IDRs. In June 2016, the proportion had more than doubled to 24 percent, or 5.3 million borrowers.
‘Not at All Surprising’
Victor Brown, a former professor and administrator at Ursinus College and now an independent analyst of higher education, says the current trends are to be expected given the significant benefits the programs provide.
“It is not at all surprising that we have seen a huge migration of student loans into the income-driven student loan program offered by the federal government, with the number of participants growing 140 percent in just three years,” Brown said. “Basic economics suggests that people will always act in their economic self-interest, and the ability to soften repayment terms at the government’s expense while waiting for the loan forgiveness that will come in 10 years with the Public Service Loan Forgiveness Program, with qualifying public service loosely defined, is just too good a deal for student borrowers to pass up.
“Did the Department of Education really fail to see this coming?” Brown said. “I don’t think so. These twin programs are basically designed to give students as close as possible the ‘free’ college education that the left has always wanted.”
Colleges ‘Gaming the System’
Thomas Lindsay, director of the Center for Higher Education at the Texas Public Policy Foundation, says the schools may be complicit, too. He says, for example, Georgetown Law School “has been shown to be gaming the student-loan system to allow it to raise tuitions at the taxpayers’ expense. Georgetown counsels its law students who go on to work for the government or a nonprofit entity on how to avoid tens of thousands of dollars of student-loan debt.”
Lindsay says federal government involvement in higher education funding has been bad for students and taxpayers alike.
“I think a better way would be to get the feds out of the student-loan business,” Lindsay said. “Barring that, we should follow Bill Bennett’s [education secretary under President Ronald Reagan] advice and give schools some ‘skin in the game’—that is, make schools pay a percentage of the losses for each student of theirs who defaults on a loan. We also should simplify the burdensome, labyrinthine financial aid system.”
Jane S. Shaw ([email protected]) is School Reform News’ higher education editor.
U.S. Government Accountability Office, “Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates,” Report to the Chairman, U.S. Senate Committee on the Budget, November 2016: https://heartland.org/publications-resources/publications/education-needs-to-improve-its-incomedriven-repayment-plan-budget-estimates