As the Biden administration begins to early implement parts of its new income-driven repayment (IDR) plan, the Saving on Valuable Education (SAVE) repayment plan, analysts at the University Pennsylvania on Monday released a new brief that puts an estimated price tag on the plan: $475 billion over the next decade.
Within that estimate, the Penn Wharton Budget Model analysts said that about $200 billion of the cost will come from currently outstanding loans that will have reduced payments as a result of the new plan. Under the SAVE plan, the amount of income protected from payments will rise to 225% of the federal poverty guideline. And after the SAVE plan goes fully into effect on July 1, 2024, analysts estimate that 53% of the current loan portfolio will move to the SAVE plan, resulting in about $869 billion in currently outstanding loans being reduced under SAVE.
The other $275 billion comes from the expected reduced payments for about $1.03 trillion in new federal student loans that will be made over the next 10 years, assuming a take-up rate of 70%, among future borrowers. According to these estimates, about 6.57% of future borrowers will never have to make any payments under SAVE.
The brief also presents a conservative estimate of the cost over 10 years, at $391 billion, and a maximum estimated cost of $559 billion. The Biden administration in January estimated that the new IDR plan would cost about $138 billion across all loan cohorts through 2032. The Department of Education did not respond immediately to a request for comment.
The analysts noted that this estimate reflects the U.S. Supreme Court’s (SCOTUS) decision to strike down President Joe Biden’s student debt relief plan and the Department of Education’s final regulations for the SAVE plan announced earlier in July. The SCOTUS ruling will increase the amount of total debt that can qualify for the new SAVE plan, thereby increasing the plan’s cost, the analysts state.
The methodology for the model was also updated to include two potential behavioral responses as a result of the final SAVE regulations: college students who may borrow more due to the generous terms of the plan, and more community colleges joining Title IV student loan programs due to the potential for a reduced cohort default rate. Some community colleges voluntarily do not participate in the federal student loan program because a high cohort default rate could jeopardize their access to other Title IV funds, the analysts note. However, since the SAVE plan introduces auto-enrollment with borrowers who are 75 days delinquent or more, the cohort default rate would drop for these institutions and could allow them to participate in the federal student loan program.
Sen. Bill Cassidy (R-La.), ranking member of the Senate Health, Education, Labor, and Pensions (HELP) Committee, responded to this estimate, calling SAVE a “reckless” plan that will “incentivize community college students to collectively begin borrowing billions of dollars per year due to the expectation that they will not have to pay back their debt.” In June, Cassidy and a group of other Republican senators introduced the Lowering Education Costs and Debt Act, a package of five bills aimed at lowering student loan debt.
“Make no mistake, Biden’s newest student loan scheme only transfers the burden from those who willingly took out loans to Americans who never attended college or who already fulfilled their commitment to pay off their loans,” Cassidy said. “This IDR rule is as irresponsible as it is unfair.”
Publication Date: 7/18/2023