Taxpayers stuck with whopping student loan bill

| New report shows program will cost much more than Obama administration projected
by Leigh Jones
Posted 12/02/16, 03:18 pm

U.S. taxpayers will write off $108 billion in federal student loans for borrowers currently enrolled in income-driven repayment plans—a much bigger hit to the federal budget than Obama administration officials predicted when they advocated for expanding the program.

And the cost will only get bigger unless Congress mandates changes to the increasingly popular subsidized loans, currently held by 24 percent of student borrowers.

A Government Accountability Office (GAO) report issued this week blasted the Department of Education for basic accounting errors that made the program look much less expensive than it turned out to be. The biggest problem: Officials didn’t project any growth in the program, even as they actively sought to enroll borrowers in it.

“At a time when our nation is facing a mammoth national debt, the Department of Education has expanded a student loan program that will cost twice as much as originally estimated,” Sen. Mike Enzi, R-Wyo., chairman of the Senate Budget Committee, said in a statement.

The GAO review said taxpayers are on the hook for $28 billion more than officials projected for loans issued between 2009 and 2016.

Enzi, who asked the GAO to analyze the federal student loan program, accused the Obama administration of manipulating the program’s terms while failing to account for the cost, all without consent from Congress.

Now lawmakers are faced with the task of either rolling back Obama administration changes that made the program especially beneficial for graduate students or finding a way to pay for the expansion. Enzi said changes to the Federal Credit Reform Act will be “crucial.”

With income-driven repayment loans, borrowers pay a set percentage of their income, usually 10 percent, for 20 years. After that, the government writes off the balance. The loans are designed to prevent students from being saddled with more debt than they can repay. But because of caps on borrowing for undergraduate degrees, the program doesn’t really help low-income students struggling to make it through college.

The biggest beneficiaries are students going to graduate school, many of whom probably would have the means to pay off loans over time based on their income potential.

“These loans are a safety net for people who are broke and don’t make much, but they are a windfall for people who could repay their loans but don’t have to,” said Jason Delisle, a senior research fellow at the American Enterprise Institute who specializes in higher education financing and student loan programs.

According to the GAO report, 39 percent of the $352 billion in student loans issued by the federal government will not be repaid. About 21 percent of that will be discharged due to death or disability. But 79 percent—$108 billion—will be forgiven under the terms of the program.

In 2013, shortly after the Obama administration launched its campaign to expand enrollment in the income-driven repayment program, Delisle warned that savvy borrowers, especially those taking out the maximum amount to pay for graduate school, would eventually overload the program.

“Because borrowers with big loan balances can repay their loans under the same [income-based repayment] terms as those with low and moderate balances, the bigger the loan balance, the bigger the benefit,” he wrote for think tank New America. “What’s more, these graduate school benefits are available even to borrowers earning a high income during repayment.”

Delisle used the example of someone who ended up with $90,000 in debt after getting a graduate degree. With his first job, say at a public university, the borrower makes $70,000 but still qualifies for the income-driven repayment program. After 10 years, the borrower might make as much as $124,000, thanks to promotions, but the government still would write off about $52,000 in debt under the terms of the loan program.

“[Income-driven repayment] is the same for everyone no matter how much they borrow,” Delisle said. “That’s the problem.”

During the campaign, President-elect Donald Trump said he wanted to increase the amount of income borrowers had to devote to loan repayments to 12.5 percent while decreasing the term to 15 years. Delisle said that change would take the program in the wrong direction. He hopes the GAO report may help Trump and his advisers change their minds.

But Delisle predicts changes will come from Congress, not the White House. He suggests lawmakers could either revert the plan to its original form when it was adopted in 2007, with much less generous subsidies, or limit the amount of money graduate students can borrow.

“Either one of those could get at this problem,” he said.

Leigh Jones

Leigh lives in Houston with her husband and daughter. She is the news editor for The World and Everything in It and reports on education for WORLD Digital.

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Comments

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  • Steve Shive
    Posted: Sat, 12/03/2016 07:08 am

    Good info. I did not know this, but wondered.

  • JerryM
    Posted: Sat, 12/03/2016 10:42 pm

    This is the Obama presidency: Trillions spent to try and safeguard his "legacy" while the country is left with the bill.  

  • PaulC
    Posted: Sun, 12/04/2016 07:41 pm

    That such things happen by design is explained in The Creature from Jekyll Island subtitled: A Second Look at the Federal Reserve by G. Edward Griffin.

     

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