The U.S. Department of Education’s Income-Driven Repayment Plan Estimates Need Improvement

By Rachel Fenton

In November, the U.S. Government Accountability Office (GAO) released a report on the cost of the U.S. Department of Education’s Income Driven Repayment (IDR) plans.  More than five million (or 24%) of Direct Loan borrowers are repaying their federal student loans through an IDR plan, which may help borrowers reduce the burden of their student debt.  Under IDR plans, a borrower’s monthly payment is calculated as a percentage of their income and the remaining loan balance may be forgiven after a repayment term of 20 or 25 years.

Key findings and recommendations from the report are below.

  • The percent of outstanding Direct Loan dollars being repaid through IDR plans increased from 20% (or $361.3 billion) in June 2013 to 40% (or $672.6 billion) in June 2016. Over the same time period, the percent of borrowers participating in IDR plans more than doubled from 10% (or 15.8 million borrowers) to 24% (or 21.8 million borrowers).
  • Federal law requires the U.S. Department of Education (ED) to estimate the long-term costs, known as “subsidy costs”, of the Direct Loan program for inclusion in the President’s annual budget request.
  • For fiscal year 2015, ED estimates that Direct Loans in IDR plans will cost the federal government about $74 billion over the repayment term, which is higher than previous estimates.
  • In fact, GAO found that current IDR plan costs are more than double original estimates for loans made between fiscal years 2009 and 2016. For the President’s fiscal year 2014 budget, ED estimated that the subsidy cost for Direct Loans in IDR plans would be $3.2 billion, which is significantly less than the current estimated subsidy cost of $9.2 billion.
  • Further, GAO found that ED’s estimating of “IDR plan costs has numerous weaknesses that may result in unreliable budget estimates”. GAO cited several examples:
    • ED has not tested the reliability of borrower income data and its forecasting of borrower incomes into the future and has not adjusted its income forecasts for inflation;
    • ED assumes that borrowers in IDR plans will recertify their incomes annually;
    • ED may have originally underestimated the volume of loans that would enter IDR plans since it did not include GRAD Plus loans until recently. In addition, policy changes made IDR plans more generous and available to more borrowers than when ED had initially estimated costs and more borrowers are becoming aware of IDR plans; and
    • ED’s quality control practices are inadequate. For example, ED does not have basic data documentation for its models used to estimate loan costs and ED’s testing model has not been independently reviewed.
  • GAO made six recommendations to improve the quality of IDR plan budget estimates. The recommendations included adjusting borrower income forecasts for inflation and making changes to improve and better test the models used for estimating IDR plan costs.