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

Nov 30, 2016

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.

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.)

The GAO estimate doesn't include future loans, or outstanding interest on current loans that will accrue; many borrowers in income-driven plans have payments so low that they don't cover the interest due each month. It also doesn't factor in whether the government will earn back some of that $108 billion in taxes. Debt forgiven under income-driven plans is counted currently as taxable income.

The new report also criticizes the Education Department's accounting practices, saying its cost estimates could be off by billions of dollars. Estimating the cost of income-driven plans requires a lot of guesswork, including estimating how many borrowers will enroll in the plans, how much they’ll earn, and how long they’ll remain in the plans. The Education Department hasn't incorporated inflation into income forecasts for borrowers, and it hasn’t considered whether borrowers will switch into or out of income-driven plans.

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