Income-Based Repayment Is Draining Federal Student Loan Program
More student loan borrowers are opting for income-driven repayment plans upon graduation, and that has had some impacts.
The federal government is beginning to pay out more money in student loans than it is bringing in for income-driven repayment plans, a recent report from the Department of Education’s Office of Inspector General said.
That reversal of fortune from the past is largely because of the higher number of borrowers who are opting for income-driven repayment (IDR) plans. More borrowers than ever are going the IDR route when it comes time to decide upon a plan.
What Are Income-Based Repayment Plans?
Under these repayment options, borrowers can choose to have the amount of their payments based off of how much money they are earning. That is a big relief to borrowers who graduate with a degree but have to start in an entry-level position where they don’t make much money in order to gain the experience necessary to advance their career.
It helps them be able to pursue their career goals while still making their payments and building a stellar credit rating. That’s a big plus as far as borrowers are concerned.
But one reason this can affect the department’s bottom line is that under the income-driven repayment plan, if there is a loan balance left by the time the repayment period is over, that balance is forgiven.
The income-driven repayment plan has proven to be enormously popular. And with good reason. Students are no longer only graduating owing a modest amount in student loans. For some students the debt is crippling and the monthly payments would be huge.
Currently, student loan debt is only second to mortgages when it comes to being the highest form of household debt.
As of Sept. 30, 2016, the department had 42 million borrowers with outstanding student loans. And in Fiscal Year 2016, the department released approximately $140.5 billion in Direct Loans to students and parents.
How Big is the Issue?
According to the report, “the portion of total Direct Loan volume being repaid through IDR plans has increased 625 percent from the FY 2011 loan cohort ($7.1 billion) to the FY 2015 loan cohort ($51.5 billion).”
In 2011, only 700,000 borrowers selected an income-driven repayment plan. In Fiscal Year 2016, that figure had increased to 5 million borrowers.
But with other types of federal student loans, more money is still coming in than is being expended. However, if the income-driven repayment levels continue to climb, it could leave the government in the precarious situation of lending more money collectively than is being repaid.
The inspector general’s recommendation was for the department to communicate better when it comes to cost information regarding loan forgiveness and the student loan program.
According to an article on the Chronicle website, the Office of Inspector General also said it will take a closer look at the issue of increased usage of the income-based repayment plans and how it could affect the future, saying “it is imperative that the department publish additional information on both historical and future estimated costs and the associated assumptions, methodologies, and limitations of information.”
A corrective plan must be developed within 30 days.