The Department of Education (ED) is on track to lend more money than borrowers will ultimately repay, and should improve its communications regarding the cost of income-driven repayment plans and loan forgiveness options, according to the agency's Office of Inspector General (OIG).
The OIG showed in an audit report that the rapid growth in participation in income-driven repayment (IDR) plans and loan forgiveness plans could soon lead to an overall positive subsidy cost for the government. That would mean that overall, the government would lend more money than borrowers would ultimately repay, regardless of repayment plan. In fiscal year 2015, the government operated with a positive subsidy cost of $11.5 billion for loans being repaid through IDR plans.
"Borrowers have been signing up for IDR plans, such as PAYE and REPAYE, at a substantial rate," the report said. "Further increases in students using IDR plans could result in the federal government and taxpayers lending more money overall than is being repaid by borrowers in future cohorts."
The report comes as lawmakers are gearing up for a major overhaul of the Higher Education Act (HEA). While House Republicans have already introduced and passed out of committee their reauthorization bill, the PROSPER Act, the Senate Health, Education, Labor, and Pensions (HELP) Committee is holding a series of hearings on reauthorization topics. The committee's chairman, Sen. Lamar Alexander (R-TN), has more than once expressed his concern with the cost of the federal student loan program.
Just last week, during a hearing on accountability and transparency, Alexander said that although in the past most student loans have been repaid, "there are some worrisome signs as we look ahead," stating that only about half of borrowers are repaying their loans, while the other half are in default or not making payments on time.
"Of the half who are making payments, nearly two-thirds of them are in the income-based repayment program — which was designed as a safety net for low-income borrowers, and capped their monthly payments and forgave the outstanding loan after 20 to 25 years," he said. "What was designed as a temporary safety net has become the standard where students expect their debt to be forgiven after a certain amount of time. We will not know the impact of so many borrowers being in this program for another decade, when the first set of borrowers begin to have their debt forgiven."
The report said that the overall portion of outstanding debt in Direct Loans being repaid through IDR plans increased 625 percent between fiscal year 2011 ($7.1 billion) and fiscal year 2015 ($51.5 billion). The number of borrowers enrolled in IDR plans has also increased by more than 600 percent since 2011, according to the report. ED reported that as of Sept. 30, 2016, more than 5 million borrowers were enrolled in an IDR plan.
ED and the Office of Federal Student Aid (FSA) are expected to relay information on the costs of the federal student loan program in a number of ways — through annual financial reports, budget documents, and strategic plans.
But in November 2016, according to the OIG report, the Government Accountability Office (GAO) said ED had not published enough information about the costs of IDR plans. The GAO said specifically that ED had not published information that could be useful to policymakers, such as the total expected costs for the loans in IDR plans, trends in the estimates, and estimated loan forgiveness amounts, among other things.
The OIG found in its review that ED's budgets and other documents prepared between February 2015 and November 2016 "contained limited cost information" for IDR plans and no cost information related to the Public Service Loan Forgiveness (PSLF) program. Those documents, the report said, also contained limited information on the cost of the Teacher Loan Forgiveness program, while ED and FSA financial reports contained no information for that program.
"Decision makers and the public should have been provided more information to fully assess whether the Department is meeting the objectives and goals of the student loan programs and properly managing program risks as more borrowers select IDR plans and loan forgiveness programs," the report said.
The OIG recommended that ED ensure the agency's chief financial officer, the chief operating officer of FSA, and the principal deputy assistant secretary annually publish additional cost information, "as well as the assumptions, methodology, and limitations underlying the calculation of estimated costs." The OIG also recommended that those same officials include additional information in the Management's Discussion and Analysis section of financial reports that "is easily understood by a nontechnical audience" and that can inform decision makers.
Finally, the OIG recommended that ED's chief financial officer and FSA's chief operating officer develop a feedback process to receive information on the usefulness of their communications. That recommendation is in line with NASFAA's work on improving FSA oversight. Specifically, NASFAA recommended expanding the FSA Data Center to include more data, with stakeholder input, while protecting student privacy and data security.
ED said in its response to the OIG that it is "committed to the transparent communication of federal student loan program costs, including describing trends in repayment options that may impact future estimated costs."
"Considering the rapid growth in enrollment in IDR plans and the adverse impact on the subsidy cost, it is imperative that [ED] publish additional information on both historical and future estimated costs and the associated assumptions, methodologies, and limitations of the information," the report said. "Likewise, information on the future costs of loan forgiveness programs should be readily available to policymakers and the public. The costs of IDR plans and loan forgiveness programs are currently dispersed among several Department and FSA publications—decision makers and the public would have to compile this information before being able to analyze it."
Publication Date: 2/6/2018