New findings from the Penn Wharton Budget Model estimate that President Joe Biden's plan to reduce monthly payments for certain borrowers with student loan debt could cost as much as $361 billion over the next decade.
One of the income-driven repayment plans, REPAYE, would be significantly revised under the proposed rule from the Education Department, with payments for borrowers set at a smaller fraction of their discretionary income, according to Fox Business.
New Student Loan Forgiveness Plan
Education Secretary Miguel Cardona issued a statement saying, "We cannot return to the same broken system we had before the pandemic, in which a million borrowers defaulted on their loans every year and snowballing interest left millions owing more than they initially borrowed."
According to the White House, the plan could save a typical graduate of a four-year university as much as $2,000 per year on their student loan payments. However, this comfort does not come cheap: The non-partisan Penn Wharton Budget Model at the University of Pennsylvania's Wharton School estimated that the proposal could cost $333-361 billion.
This is more than twice the Department of Education's net contribution of $137.9 billion to the federal budget. The disparity is due to the government's assumption that enrollment in the income-based plans would remain constant, whereas Penn Wharton predicted that the more generous plan would cause the participation rate to increase from 33% to 75% of the eligible loan volume.
The analysis noted that the Education Department's estimate did not account for potential borrowers switching from non-IDR plans to IDR plans due to the new IDR plan's more generous features. Moreover, the Education Department disagreed with the analysis, citing the administration's proposal to reform IDR plans in a responsible manner.
The Penn-Wharton analysis is based on projections of borrower behavior, which student loan holders may or may not adhere to. The estimates for the IDR reform plan would be in addition to the cost of the government directly forgiving federal student loans, for which the Supreme Court is scheduled to hear a challenge later this year. In a previous analysis, Penn-Wharton estimated that the latter project could cost at least $469 billion over a decade.
Presently, there are four IDR programs, each with its own rules and criteria, making it difficult for borrowers to navigate, as per CBS News. One study found that some borrowers' student loan debt doubled or tripled despite their participation in a repayment plan, as a result of negative amortization.
Negative amortization occurs when a loan's interest is not covered by the monthly payment, resulting in the unpaid interest being added to the loan's principal. Under the Biden reform, the administration would focus on one program that it intends to simplify and make more generous, while phasing out three IDR plans. The remaining plan is known as the REPAYE (Revised Pay As You Earn) program.
The Penn-Wharton analysis stated, "With the new feature of eliminating interest accumulation, the adoption rate for the IDR plan would increase substantially." In addition, a simplified application process would likely increase enrollment.
The economists added that there are still many other questions that need to be answered. Given the theory that universities raise tuition costs in response to government subsidies, it is unclear how the IDR reform plan would affect tuition costs. The plan could also encourage students to borrow more money, given that they would be eligible for subsidized loans.
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Will You Have $0 Payments?
Borrowers enrolled in the existing IBR, ICR, and PAYE plans will be required to enroll in the new plan through their loan servicer or the Federal Student Aid website once the new plan is enacted into law. The new proposed regulations do not include modifications to accommodate those with Parent PLUS loans, which cannot be repaid under an IDR plan.
According to an ED press release, to qualify for $0 monthly payments, borrowers must earn less than approximately $30,600 annually, while individuals in families of four must earn less than approximately $62,400.
The new plan will reduce the required discretionary income payment for undergraduates from 10% to 5%, halving their financial responsibility. Those with graduate loans will continue to pay 10%, and those with existing loans will pay 10%.
The current REPAYE plan defines discretionary income as any earnings in excess of 150 percent of the federal poverty guidelines, which are used to determine eligibility for specific programs and benefits. Under the new rules, borrowers will not be required to make payments based on incomes exceeding 225 percent of the federal poverty level.
The Biden administration is attempting to rectify what it deems to be a flawed IDR plan system and a broader issue with unending debt payments. The new REPAYE legislation, if enacted, would allow many borrowers with original federal student loans of $12,000 to repay them after 10 years. As per the current REPAYE plan rules, any remaining debt after 20 years of payments will be forgiven.
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