Changes to a federally-subsidized student loan repayment program would save money, in part, based on new rules requiring higher payments from high-income borrowers.
According to a report released March 29 by the nonpartisan Congressional Budget Office (CBO), the reforms to the income-driven repayment programs for federally subsidized education loans would cut government expense for the program by roughly $23 billion over the next decade.
Under the program, borrowers with too low an income can (at least temporarily) avoid monthly payments entirely. Loans are forgiven after a predetermined amount of time in the program.
Rajeev Darolia, an assistant professor at the University of Missouri, whose research focuses on student loan policy, told AMI Newswire that much of that money comes from the removal of the maximum payment cap on loans being repaid under income-drive plans. The original such plan, Pay As You Earn (PAYE), ensured student loan repayments were pegged at 10 percent of a borrower’s discretionary income, or the amount that would be paid under a standard 10-year loan repayment plan, whichever was lower. Beginning in 2016, the revised PAYE (REPAYE) eliminates the 10-year option, requiring high-income earners to make higher payments than they would under a traditional loan payback.
“What the administration claims is that this is allowing … a better targeting of subsidies,” Darolia said. “From a broader sense, that means the subsidies are theoretically going to those who need it the most … but it does come at the cost to those that are making high incomes.”
According to a report from the College Board, 47 percent of all student debt in the U.S. was held by people in households in the top 25 percent for income. Only 11 percent was held by households in the bottom 25 percent, the report found.
The new program also attempts to recapture additional money by extending the amount of time before graduate-level loans are forgiven. Under previous plans, loans that have been paid on for 20 years would have remaining balances forgiven. The new plan makes this 25 years for loans secured for a graduate program.
The College Board report found graduate students in the 2014-2015 school year needed nearly four times the amount per-student in federal loans as undergraduates, amounting to an average of $16,570.
REPAYE would expand the reach of the government’s student loan repayment programs to as many as five million more direct loan holders, according to estimates from the Department of Education. This includes the inclusion of holders of older student debt, dating to before July of 2006, that were originally excluded from the income-based plans.
Married borrowers would now also have to claim their spouse’s income as part of the repayment calculation. Previously, such borrowers could qualify for repayment options using only their separately-filed tax returns.
Darolia said he largely sees the move as an effort toward simplifying the loan repayment process. Currently, borrowers have access to 11 different programs to manage repayment, targeting different financial needs.
The Department of Education does not clarify whether borrowers who begin making higher payments under REPAYE would be able to save money by then switching to their original loan payments. Darolia is optimistic, however, that many borrowers would stick with the program as a form of “insurance.”
“It’s insurance against a negative shock or a bad drop,” Darolia said. “If you’re an investment banker and you work for Bear Stearns in the mid-2000’s, you may have had a high income, but maybe you’re worried the economy is going to crash and you’ll lose your job … for a lot of students, a lot of debtors, there’s some value in that.”
In addition to the costs recouped by high-income borrowers and graduate loans, Darolia warned that the drop in cost for the program comes from revised estimates of other expenses. Estimating items such as loan default rates, he said, relies on a number of assumptions about items such as macroeconomic conditions, labor market, and policy changes.
“Forecasting revenue from credit is really hard, and much harder with the government loans,” Darolia said. “My guess is that if you look over the past four or five years, you’re going to see some pretty strong fluctuations of forecasted revenue, just because of changing assumptions.”