Federal Student Loan Forgiveness Plans Cost Govt. Nearly $22B More Than Expected

Last spring, legislators and researchers began voicing concerns that federal student loan forgiveness plans could become a victim of their own success. This week, we learned just how successful – and costly – such program are; information that once again created a chorus of concerns regarding the sustainability of such programs.

The Washington Post reports that tucked into the President’s 2016 budget proposal is a revised estimate of costs for the repayment plans, totaling $22 billion more than government officials expected.

For a little perspective, last April the estimated cost of the same program was expected to reach $14 billion, exceeding government expectations by 90%.

The new expenses are largely based on the increased use of the so-called “Pay As You Earn” program, which allows borrowers to pay 10% a year of their discretionary income in monthly installments. The unpaid balances for consumers working in the public sector or for nonprofits are then forgiven after 10 years and those working in the private sector after 20 years.

Income-driven plans like Pay As You Earn and others are designed to prevent borrowers from defaulting on their loans, a problem faced by about 20% of people repaying college debt.

Still, the program’s immense popularity – the number of borrowers enrolled in the programs at the end of September was 64% higher than the same time a year ago – has some officials wondering if such plans only cause more burdens for taxpayers.

Terry Hartle, senior vice president at the American Council on Education, tells the Post that he’s unsure whether tax credits and deductions are the best use of government resources.

“Trading tax breaks for increased Pell or better loan repayment options is intellectually appealing, but it is politically and practically impossible to pull off,” he said.

Despite concerns, the Post reports that the $22 billion expense represents just 2% of the federal student loan program.

Additionally, the Congressional Budget Office estimates that as graduates repay their loans over the next decade the government will actually yield $135 billion.

The President’s recently released budget does include several proposed reforms for current repayment plans, including limiting the participation of graduate students and removing the payment cap as consumers earn more.

The Post reports that such changes could save $14 billion over the next 10 years.

Lowering student debt payments is costing taxpayers billions of dollars [The Washington Post]