Report: Income-Driven Repayment Costs More than Boosters Say
Posted By Derek Johnson on December 8, 2016 at 3:17 pm
During the past four years, many policymakers, higher education experts and others have presented income-driven repayment as some near-universal cure for student-loan debt. Under the Obama administration, the policy started as a way to help low-income graduates who couldn’t afford to pay their monthly loan bills and slowly expanded to qualify millions of additional Americans.
Today more than 5 million Americans use some version of IDR. Mostly, this has helped more to mask the depth of the student loan crisis than solve it. How does it muddle the true picture of the debt? By artificially driving down the total number of delinquencies and requests for loan forbearance due to financial distress.
This has caused some supporters to frame income-driven repayment as an unalloyed good with few if any significant tradeoffs or drawbacks worth mentioning. The White House used the program to justify its report that student debt is actually “good” for the economy; The New York Times pointed to increased IDR enrollment and asked if the student loan crisis has already been solved. Looking at the quarterly reports put out by the Department of Education makes it clear that it believes the expanded use of income-driven repayment is an unambiguously good thing.
“We’ve made it a priority to give Americans better options to manage their student loans and make sure they know about those options,” U.S. Secretary of Education Arne Duncan said. “There’s more work to do, we won’t stop fighting to help people who are struggling to pay back their student loan debt, but the fact that more and more borrowers are taking advantage of the opportunity to cap their monthly payments is a good sign.”
The higher cost of income-driven repayment
Of course – as GoodCall has pointed out in the past – many people using income-driven repayment are not really saving money in the long run. Instead, they’re just , opting to kick the can down the road. Anyone who has dealt with student loans knows delaying full payments only means that there is a higher principal balance left on which to accrue interest. Thus, the $100 you saved this month through income driven repayment will cost much more in debt down the road due to interest.
Sooner or later, that (now larger) bill comes due. In many cases, it is paid by graduates languishing in debt hell well into their 40s and 50s, long after they should have been done with their student loans. A new report by a government watchdog agency shows that the federal government will likely be underwriting a substantial portion of the total as well. According to the Government Accountability Office, loan forgiveness for income-driven repayment participants will end up costing $108 billion more than previous estimates.
“While actual costs cannot be known until borrowers repay their loans, GAO found that current IDR plan budget estimates are more than double what was originally expected for loans made in fiscal years 2009 through 2016,” the authors write.
“Due to growing IDR plan popularity, improving Education’s estimation approach is especially important,” they add.
Currently the government estimates that income-driven repayment participants will take out $355 billion in loans, with students paying back $281 billion and the government forced to subsidize the remaining $74 billion. That means that for every dollar IDR participants take out in student aid, the federal government will wind up eating .21 cents in loan forgiveness, more than one-fifth.
As participation in the program has grown, so too have its costs. With the exception of 2012, the program has become more expensive every year since 2007, with the government projected to subsidize $14.6 billion in 2017.
Furthermore, the GAO report says the Department of Education’s methodology consistently underestimated the annual costs of the program even after adjusting for changing conditions. The report says the most likely reasons for these mistakes include increased participation the in the programs, policy changes to make the program more generous and not counting financial aid from the Grad PLUS loans program.
“Some uncertainty is unavoidable when anticipating long-term loan costs, but we found numerous shortcomings in Education’s estimation approach and quality control practices that call into question the reliability of its budget estimates and affect the quality of information Congress has to make informed budget decisions,” the authors write.
Income-driven repayment is a Rube Goldberg device: an overly convoluted, roundabout way to avoid having a conversation about the systemic problems that make college so expensive in the first place.
While the programs certainly can play a role in providing relief to certain groups of borrowers, policymakers and experts should recognize that it is a limited and temporary solution to the woes that plague the current higher education system. Costs have been steadily rising since the 1980s, along with increased borrowing in federal and private loans needed to make up the difference.
The only requirement necessary for a college to gain access to federal student aid dollars is accreditation, a process that carries inherent conflicts of interest and fails to weed out poor performing universities that exist almost solely to suck up Title IV funding. Some states have begun to reverse their decades long trend of cutting funding for higher education, but current funding levels do not come close to matching the historical norms experienced before the college cost boom of the 1980s and nearly every state is one recession away from further funding cuts.
All these programs cry out for more systemic policy solutions, ones that radically rethink the role of higher education in a 21st century global economy. Student debt is out of control. Until the federal government starts getting serious about addressing the dysfunctions driving costs up, student loan debt will continue to strangle many college graduates.