The federal student loan program is losing billions of dollars as more and more Americans sign up for income-driven repayment (IDR) plans.
Here’s how an IDR plan works: a borrower agrees to monthly payments that are calculated based on his salary. If he meets the payments for a certain time period (typically between 10 and 25 years), the remainder of the debt is forgiven.
IDR plans, promoted heavily by the Obama Administration, were initially created to prevent borrowers from defaulting on loans after the recession. Now, the plans are being used on a scale far larger than originally intended.
According to a recent report from the Department of Education’s inspector general, these plans sucked $20 billion from the $25 billion in revenue the feds expected to make on loans issued during FY2015.
The report also noted that between 2011 and 2015, the number of Americans using IDR plans to pay off student loans increased by more than 600%.
“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,” argues Senator Lamar Alexander (R-TN). “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.”
Roughly 43 million Americans owe a cumulative $1.4 trillion in federal student debt, making it the highest form of debt in the US after mortgages.
Many if not most of these people don’t expect to pay back the full amount they borrowed to go to college. This habit is only tolerated because it is the government losing and not private companies.
At the same time, IDR plans provide incentives for colleges and universities to increase their prices to the point that they are unaffordable even for wealthy Americans.
In his report, the Inspector General urged the Department of Education to improve transparency and communication in regards to costs associated with student loans and repayment programs and ordered the department to “publish additional information on both historical and future estimated costs and the associated assumptions, methodologies, and limitations of the information”
The Department of Education has 30 days to develop a corrective action plan.
In many cases, the following options are also available for Americans with student debt:
• Repayment assistance from your state
• Employer student loan matching benefit
• Loan forgiveness in exchange for military service
• Public service programs
• Teacher loan forgiveness
Editor’s note: While the volume of loans is not quite as high as the mortgage loans in 2008, this is almost as bad. It threatens the livelihood of our young people by raising the price of education beyond what they can afford. Universities have absolutely no incentive to make education more affordable, since they can simply require the student to borrow more money.