CBO: IDR Plans Are Increasing and Costly — Especially When it Comes to Graduate Students

By Joelle Fredman, NASFAA Staff Reporter

On the heels of President Donald Trump’s budget for fiscal year (FY) 2021, which called for instituting loan limits for graduate students, the Congressional Budget Office (CBO) released a report highlighting the growing number of students borrowers in income-driven repayment (IDR) plans and its cost on the federal government — both of which are heavily impacted by that population of learners.

Sen. Mike Enzi (R-Wyo.), the chairman of the Senate budget committee who requested the report alongside Senate education committee chairman Lamar Alexander (R-Tenn.), said CBO’s findings confirm “the explosive growth of [IDR] plans is unsustainable.”

“While higher education provides valuable opportunities, including increased earnings potential, it is crucial that lawmakers review these programs to ensure they are targeting limited federal resources appropriately and slowing the unsustainable growth in the cost of higher education,” Enzi said in a statement.

CBO reported that enrollment in IDR plans is growing in popularity — especially among graduate students. While the agency found that between 2010 and 2017, the proportion of undergraduates enrolled in IDR plans grew from 11% to 24%, that figure grew from 6% to 39% for graduate students. 

Between those years, the total balance of loans in IDR plans grew from 12% (or by $24 billion) to 45% (or by $384 billion) — and over the next decade, CBO projected, almost half ($490 billion) of the $1 trillion in loans that will be disbursed to students will be repaid using IDR plans.   

CBO estimated that of the loans disbursed over the next decade, more than $200 billion will be forgiven — $40.3 billion for undergraduates and $167.1 billion for graduate students. Plus, CBO wrote that loans repaid in IDR plans will cost the government much more than those repaid in fixed-repayment plans. Specifically, CBO reported that the government will lose 16.9 cents for every dollar disbursed on those loans, while gaining 12.8 cents on other loans. 

At the same time, CBO reported that despite the large balances and slower repayment associated with IDR plans, those borrowers default at lower rates than their counterparts in fixed-repayment plans. CBO wrote this may be due to a number of reasons, including that, “given that borrowers are automatically enrolled in a 10-year fixed payment plan unless they select another plan, those who choose other options may have greater financial literacy.”

“Alternatively, borrowers in income-driven plans may be less likely to default because those plans keep payments at a more manageable level when borrowers have low income,” CBO added. 

CBO also included in its report several projections about how changes to IDR plans would affect borrowers and the cost to the government — such as adjusting the timing of forgiveness, consolidating the number of plans offered or eliminating IDR plans entirely, and tweaking the share of discretionary income used to calculate loan repayments. 

Overall, CBO’s projections show changes to IDR plans for graduate students will have a much larger impact than changes for undergraduate students, “because graduate students are more likely to participate in such plans and tend to have larger — sometimes much larger — loan balances.”

For example, if IDR plans were no longer offered as a repayment option for borrowers, CBO estimated it would reduce the lifetime cost of loans in the next decade disbursed to undergraduate borrowers by $25.1 billion and by $96.9 billion for graduate students. And, if required payments were increased from 10% of a borrower's discretionary monthly income to 12%, CBO estimated it would reduce the lifetime cost of those loans by $4 billion for undergraduates and $15.1 billion for graduate students. 

In Trump’s budget, he proposed to limit the amount of loans graduate students and parents of students can borrow to fund their education. Specifically, the budget includes an annual cap of $50,000 on Grad PLUS Loans, and an aggregate cap of $100,000. 

With the same components as last year's budget, Trump also proposed consolidating IDR plans into a single plan with a discretionary income cap of 12.5%, a 15-year repayment term for undergraduates, and a 30-year repayment term for graduate students.


Publication Date: 2/18/2020

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