Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options

Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options

At a Glance

Introduced as a approach to make student loan compensation extra manageable, income-driven plans restrict funds to a proportion of debtors’ revenue and permit for loan forgiveness after 20 or 25 years. The Congressional Budget Office examined how income-driven plans differ from plans that require fastened month-to-month funds, how enrollment in income-driven plans has modified over time, and the way these plans are projected to have an effect on the federal funds.

  • Growth in Loans Repaid Through Income-Driven Plans. The quantity of loans in income-driven plans grew quickly over the previous decade as they turned out there to extra debtors and their phrases turned extra favorable. CBO estimates that just about half the amount of direct student loans in compensation was being repaid via income-driven plans on the finish of 2017. Many debtors—particularly these with low revenue and huge balances—make funds which are too small to cowl the curiosity on their loans, which causes their balances to extend over time.
  • Budgetary Costs of Income-Driven Plans. CBO initiatives that of the loans disbursed between 2020 and 2029, these repaid via income-driven plans could have better lifetime prices to the federal government than these repaid via fixed-payment plans. Estimated below the accounting guidelines of the Federal Credit Reform Act of 1990, the fee for loans repaid via income-driven plans is the same as 16.9 % of the disbursed quantity; for different loans, the fee is −12.8 % of the disbursed quantity. In different phrases, for each greenback disbursed, the federal government is projected to lose 16.9 cents for loans repaid via income-driven plans however achieve 12.8 cents for different loans.
  • Options for Changing Income-Driven Repayment. CBO assessed the prices of coverage choices that might change the supply of income-driven plans or change how debtors’ required funds are calculated. CBO estimates that modifications to income-driven plans for graduate students would have a a lot bigger impact on the funds than modifications for undergraduate students. That is as a result of graduate students usually tend to take part in such plans and have a tendency to have bigger—generally a lot bigger—loan balances.

Notes

Unless this report signifies in any other case, all years referred to are federal fiscal years, which run from October 1 to September 30 and are designated by the calendar 12 months through which they finish.

Numbers within the textual content, tables, and figures might not add as much as totals due to rounding.

PLUS loans to oldsters are usually not eligible for compensation via income-driven plans and have been excluded from CBO’s evaluation on this report.

Student loan debtors who took out student loans just for undergraduate research are outlined as undergraduate debtors. Those outlined as graduate debtors took out at the very least one loan for graduate research and may have borrowed on the undergraduate stage.

The estimates on this report are based mostly on CBO’s August 2019 baseline funds projections, which incorporate the belief that present legal guidelines would usually stay unchanged.

In this report, the subsidy price for a fiscal 12 months is measured by multiplying the amount of loans disbursed in that 12 months by their common subsidy fee (their projected price as a proportion of {dollars} disbursed). In its baseline projections and price estimates, CBO would alter that complete to account for the timing results of a number of disbursements of some loans in two fiscal years.

Summary

The quantity of excellent student loans has grown significantly over the previous decade because the variety of debtors and the quantities they borrow have elevated. In the 2018–2019 tutorial 12 months, the federal government issued $76 billion in new loans to 7.6 million students. Overall, as of December 2018, excellent student loans issued or assured by the federal authorities totaled $1.4 trillion—or 6.8 % of gross home product (GDP).

Between 1965 and 2010, most federal student loans had been issued by personal lending establishments and assured by the federal government, and most student loan debtors made fastened month-to-month funds over a set interval—usually 10 years. Since 2010, nonetheless, all federal student loans have been issued instantly by the federal authorities, and debtors have begun repaying a big and rising fraction of these loans via income-driven compensation plans. Required repayments in such plans rely not solely on a loan’s steadiness and rate of interest but additionally on the borrower’s revenue.

On common, debtors in income-driven plans make smaller month-to-month funds than different debtors, and the plans present loan forgiveness if debtors haven’t paid off their steadiness after making funds for a sure variety of years. For these causes, loans repaid via income-driven plans are extra expensive to the federal government than loans repaid via fixed-payment plans.

How Do Income-Driven Repayment Plans Differ From Other Repayment Plans?

Introduced as a approach to make student loan compensation extra manageable, income-driven plans scale back the required month-to-month funds for debtors with low revenue or massive balances. Under the preferred income-driven plans, debtors’ funds are 10 or 15 % of their discretionary revenue, which is usually outlined as revenue above 150 % of the federal poverty guideline. Furthermore, most plans cap month-to-month funds on the quantity a borrower would have paid below a 10-year fixed-payment plan.

The earnings and loan balances of debtors in income-driven plans decide whether or not they may repay their loans in full. Borrowers who haven’t paid off their loans by the tip of the compensation interval—usually 20 or 25 years—have the excellent steadiness forgiven. (Qualifying debtors might obtain forgiveness in as little as 10 years below the Public Service Loan Forgiveness, or PSLF, program.) CBO estimates that the majority debtors in income-driven plans initially make funds which are too small to cowl accruing curiosity—and subsequently, over the primary a number of years of compensation, their loan balances develop fairly than shrink. If these debtors finally earn sufficient to make bigger funds and totally repay their loans, they often pay greater than they might have in a fixed-payment plan.

CBO additionally discovered that debtors default on their loans at a lot decrease charges in income-driven plans than in different plans. Default charges are in all probability decrease for loans in income-driven plans as a result of funds are lowered for debtors who’ve decrease revenue and are much less capable of pay. But debtors who decide in to the plans may be much less prone to default for different causes—for instance, as a result of they’re extra conscious of their monetary choices.

How Has Enrollment in Income-Driven Repayment Plans Changed Over Time?

The variety of debtors in income-driven plans grew quickly between 2010 and 2017 because the plans turned out there to extra debtors and their phrases turned extra favorable. Among debtors who had taken out direct loans for undergraduate examine, the share enrolled in income-driven plans grew from 11 to 24 %. Among those that had taken out direct loans for graduate examine (and for undergraduate examine as properly, in lots of instances), the share grew from 6 to 39 %.

The quantity of loans in income-driven plans has grown even sooner than the variety of debtors as a result of debtors with bigger loan balances usually tend to choose such plans. In explicit, graduate debtors have a lot bigger loan balances, on common, and usually tend to enroll in income-driven plans than undergraduate debtors. CBO estimates that about 45 % of the amount of direct loans was being repaid via income-driven plans in 2017, up from about 12 % in 2010.

What Are the Budgetary Costs of Income-Driven Repayment Plans?

By regulation, CBO follows the procedures specified within the Federal Credit Reform Act of 1990 (FCRA) to estimate the prices of the student loan program. Under FCRA, a loan’s lifetime price to the federal government is described as a subsidy and is recorded within the funds within the 12 months the loan is disbursed. The subsidy is measured by discounting all future money flows related to the loan—together with the quantity disbursed, the principal and curiosity paid, and debt collected from debtors in default—to a gift worth, or present greenback quantity. (The administrative prices of disbursing and servicing loans usually are not included.)

On that FCRA foundation, CBO estimated in its August 2019 baseline funds projections that if present legal guidelines remained unchanged, $1.05 trillion in federal student loans can be disbursed to students between 2020 and 2029, growing the deficit by $10.7 billion. (Those estimates exclude PLUS loans to the dad and mom of students, which aren’t eligible for compensation via most income-driven plans.) Loans repaid via income-driven plans had been projected to end in bigger subsidies than loans repaid via fixed-payment plans. Specifically, CBO estimated that $490.4 billion in disbursed student loans can be repaid via income-driven plans, with a subsidy of $82.9 billion, and $562.7 billion in loans can be repaid via fixed-payment plans, with a adverse subsidy—in different phrases, a achieve—of $72.2 billion. For these loans, the federal government’s projected price as a proportion of loan {dollars} disbursed, often called the subsidy fee, is 16.9 %, on common, for income-driven plans and −12.8 %, on common, for fixed-payment plans.

CBO additionally estimates the prices of student loans utilizing the fair-value technique, which displays the compensation a non-public investor would require to undertake the chance related to these loans. In August 2019, CBO estimated that the fair-value subsidy of the loans disbursed to students between 2020 and 2029 can be $262.8 billion; loans repaid via income-driven plans would have a subsidy of $211.5 billion and a subsidy fee of 43.1 %, and loans repaid via fixed-payment plans would have a subsidy of $51.4 billion and a subsidy fee of 9.1 %. (The prices of student loans seem bigger when estimated utilizing the fair-value technique as a result of it accounts for the price of market danger—the chance that arises as a result of debtors usually tend to default on their debt obligations when the economic system is weak.)

The prices of loans repaid via income-driven and fixed-payment plans differ not solely due to the phrases of the plans however due to the debtors who enroll in them. In explicit, debtors who choose income-driven plans are inclined to borrow more cash. CBO additionally expects the typical subsidy fee of loans in income-driven plans to be greater for loans to graduate students than loans to undergraduate students, primarily as a result of graduate students take out bigger loans, that are much less prone to be paid off.

Of the loans disbursed from 2020 to 2029 and repaid via income-driven plans, CBO estimates that undergraduate debtors would have $40.3 billion forgiven and graduate debtors would have $167.1 billion forgiven. (Those forgiven balances, which embrace unpaid curiosity, are discounted to their worth within the 12 months the loans had been disbursed to make them extra akin to the unique disbursement.) The forgiven quantities are equal to 21 % of the disbursed quantity for undergraduate debtors and 56 % of the disbursed quantity for graduate debtors. For comparability, the current worth of funds on the identical loans is the same as 84 % of the disbursed quantity for undergraduate debtors and 82 % of the disbursed quantity for graduate debtors. (Because accrued curiosity is included within the calculations, and rates of interest on student loans are greater than the low cost fee, loan funds and forgiven balances add as much as greater than 100 % of the initially disbursed quantities.)

The compensation of student loans impacts not solely federal spending but additionally tax revenues. In each fixed-payment and income-driven compensation plans, student loan curiosity is deductible within the tax 12 months through which it’s paid. Those tax deductions scale back federal revenues. In addition, debtors in income-driven plans whose loans are forgiven have the unpaid steadiness included of their taxable revenue for that 12 months (except the loans are forgiven via the PSLF program). The ensuing tax revenues partly compensate the federal government for the price of forgiven loans. However, revenue taxes that might be forgone via deductions for curiosity funds or collected on forgiven balances usually are not included within the estimated budgetary prices of income-driven compensation plans on this report.

What Are Some Options for Changing Income-Driven Repayment Plans?

CBO assessed the prices of two broad units of choices for altering income-driven compensation plans. One set of choices would change the supply of such plans. The different would change debtors’ funds. CBO analyzed how the choices would have an effect on the federal government’s prices via 2029 in the event that they utilized to all loans taken out by new debtors as of July 1, 2020. In addition, CBO individually examined how the prices of loans to undergraduate and graduate debtors would change below the choices.

The choices had been chosen for this evaluation both as a result of they’re just like insurance policies that lawmakers have thought of prior to now or as a result of they illustrate how delicate the plans’ prices are to sure coverage parameters.

Options That Would Change the Plans’ Availability

The three choices on this class would change the supply of income-driven plans by making the Revised Pay as You Earn (REPAYE) plan the one income-driven plan, by making the REPAYE plan the one compensation plan, or by making fixed-payment plans the one compensation plans. The second and third choices are diametric alternate options: enrolling all student debtors in income-driven plans or eliminating income-driven compensation fully. In CBO’s estimation, the second possibility would enhance the subsidy price of loans by $36 billion from 2020 to 2029; the third would lower the subsidy price by $122 billion over the identical interval.

When estimating the consequences of adjusting income-driven compensation plans, CBO targeted on the REPAYE plan for 2 causes. First, it’s the latest income-driven plan. Second, the plan doesn’t cap debtors’ funds, which can also be true of the income-driven plans in most up-to-date Congressional proposals to switch the student loan program.

Options That Would Change How Borrowers’ Payments Are Calculated

The three choices on this class would change debtors’ funds in income-driven compensation plans by altering the portion of discretionary revenue used to calculate funds, the definition of discretionary revenue, or the timing of loan forgiveness. Each of these choices was analyzed along with the primary possibility from the earlier set—that’s, CBO thought of the REPAYE plan to be the one income-driven plan in every case.

Chapter 1 An Introduction to Income-Driven Repayment Plans

Income-driven compensation plans are comparatively new choices within the student loan program, however the proportion of student loans being repaid via them is massive and rising. The first income-driven plan was launched in July 1994. Since then, a number of others have been created, every with barely totally different options and parameters.

An Overview of Federal Student Loans

Most student loans had been issued by personal lending establishments and assured, or insured, by the federal authorities till 2010. Today, the overwhelming majority are instantly issued by the federal authorities. The quantity of excellent federal assured and direct student loan debt has elevated by 128 % over the previous 10 years. As of December 2018, it totaled $1.4 trillion.

Between 1965 and 2010, the federal authorities assured loans issued by banks and nonprofit lenders via the Federal Family Education Loan (FFEL) program. In 1994, the Congress established the William D. Ford Federal Direct Loan Program, which instantly issued student loans with funds offered by the Treasury. The two packages operated in parallel, issuing loans below almost an identical phrases, till the Health Care and Education Reconciliation Act eradicated new FFEL loans in 2010. Since then, all new federal student loans have been made via the direct loan program.1

There are three sorts of student loans: backed Stafford, unsubsidized Stafford, and PLUS. Subsidized Stafford loans can be found to undergraduate students with monetary want.2 Those loans don’t accrue curiosity till funds are due (in different phrases, the federal government subsidizes the curiosity), whereas different loans start to accrue curiosity after they’re disbursed. Unsubsidized Stafford loans can be found to each undergraduate and graduate students regardless of their monetary want. PLUS loans can be found to graduate students and the dad and mom of undergraduate students.

The numerous loans are topic to totally different limits and have totally different rates of interest. Each kind of loan is restricted by the student’s anticipated price of attendance; Stafford loans are additional restricted on the idea of the borrower’s tutorial stage and dependency standing. Interest charges have been greater for loans to graduate students than loans to undergraduate students because the 2013–2014 tutorial 12 months.3 After leaving faculty, students with a number of loans can mix them right into a single consolidation loan with an rate of interest that could be a mix of the unique ones.4

Once debtors start repaying their loans, they’re required to make funds every month. Payments on Stafford loans and PLUS loans to graduate students usually start as soon as debtors have been out of college for six months. Borrowers might droop their loan funds by requesting a deferment if, for instance, they’re enrolled at school, serving within the navy, or experiencing financial hardship. For debtors with backed Stafford loans, curiosity accrual usually pauses throughout deferment. If debtors usually are not eligible for deferment, they might request forbearance, which additionally permits them to postpone or scale back their month-to-month funds, though curiosity nonetheless accrues.

A loan is taken into account to be delinquent if the borrower doesn’t make a fee by the due date and to be in default when funds are at the very least 270 days late. Borrowers with delinquent loans have their info reported to credit companies, and people with loans in default can have their wages and tax refunds garnished. Despite these potential penalties, student loans have the best delinquency fee of all sorts of shopper debt, in accordance the Federal Reserve Bank of New York.5 For instance, within the first quarter of 2019, the 90-day delinquency fee was 10.9 % for federal and personal student loans and solely 4.7 % for auto loans.

Income-Driven Repayment Plans

Income-driven compensation plans had been launched by the Congress to supply monetary aid for debtors who would possibly in any other case be prone to default. (The plans have similarities with these in different international locations; see Box 1-1.) Throughout the historical past of the student loan program, most debtors have enrolled in 10-year fixed-payment plans, which require fastened month-to-month funds below a schedule just like that of a 10-year mortgage. Unless they choose another choice, debtors are enrolled robotically within the 10-year fixed-payment plan.6

Box 1-1.

Income-Driven Repayment Plans in Other Countries

Australia and the United Kingdom have income-driven compensation plans for student loans which are just like these within the United States.1 However, in contrast to debtors within the United States, debtors in these international locations would not have a selection of compensation plans: All are required to enroll in income-driven plans, that are administered in coordination with the nationwide tax authorities.2 That design retains debtors with low earnings or massive balances from enrolling in income-driven plans at better charges than different debtors who would obtain much less profit.

Australia was among the many first international locations to undertake an income-driven student loan compensation system, in 1989. Borrowers pay a proportion of their annual revenue above a threshold. For instance, debtors who started repaying their loans within the 2018–2019 tutorial 12 months paid between 2 and eight % of revenue over 51,957 Australian {dollars} (roughly $38,864 in 2018 U.S. {dollars}). The compensation fee relies on a progressive components, such that debtors pay a bigger portion of their revenue as their earnings enhance. Payments are collected by the Australian Tax Office, and debtors can elect to have their student loan funds withheld from their wages like revenue taxes. Unlike within the United States, unpaid balances usually are not forgiven.

The United Kingdom adopted an income-dependent compensation coverage for all student loan debtors in 1998. As within the Australian and U.S. methods, debtors pay a proportion of their revenue above a threshold. Among those that started repaying their loans within the 2018–2019 tutorial 12 months, undergraduate debtors owed 9 % of their revenue over £25,000 (roughly $33,250 in 2018 U.S. {dollars}), and graduate debtors owed 6 % of their revenue over £21,000 (roughly $28,000 in 2018 U.S. {dollars}). Loan balances are forgiven after a interval that relies on debtors’ age or when their final loan was issued—as soon as the borrower is 65 years outdated, after 25 years, or, for newer loans, after 30 years. Forgiven balances usually are not handled as taxable revenue. As in Australia, funds are collected by the nationwide tax authority—Her Majesty’s Revenue and Customs.


By distinction, income-driven plans tie funds to debtors’ family revenue, requiring funds of a fraction—often 10 or 15 %—of their discretionary revenue.7 (In most income-driven plans, discretionary revenue is outlined as revenue over 150 % of the federal poverty guideline.) Outstanding balances are forgiven after both 20 or 25 years of qualifying funds. A qualifying fee is any month-to-month fee that is the same as or better than the quantity scheduled below the plan; for debtors with no discretionary revenue, qualifying funds could also be as little as zero {dollars}.

Borrowers in income-driven plans may qualify for forgiveness after 10 years of funds via the Public Service Loan Forgiveness program, which was created by the College Cost Reduction and Access Act of 2007. To qualify, debtors should be employed full time by a public-service employer.8 The Congress launched this system to encourage extremely educated debtors to enter lower-paying jobs in fields comparable to public-interest authorized companies, public security, well being care, and schooling.9 However, some researchers have instructed that this system’s beneficiant loan forgiveness would possibly incentivize students to overborrow.10 Although forgiven loan balances are usually included in debtors’ taxable revenue, balances forgiven via the PSLF program usually are not taxed.11

Income-driven plans supply a number of benefits to debtors. One benefit is that required funds are small if a borrower’s revenue is low. Those smaller required funds may also help debtors keep away from default—and, in flip, penalties comparable to garnished wages and obstacles to future borrowing. Also, most plans restrict required funds to the quantity debtors would owe below a 10-year fixed-payment plan, no matter how a lot their revenue rises. Finally, as a result of debtors’ loans are forgiven so long as they make the required quantity of funds, many debtors won’t should repay the complete principal or the entire curiosity that has accrued through the compensation interval.

However, income-driven plans may have disadvantages. Some debtors might pay extra curiosity over their compensation time period than they might have in a fixed-­fee plan, though debtors can keep away from accruing extra curiosity by paying greater than their plan requires. Furthermore, debtors who obtain loan forgiveness might face a big tax legal responsibility if the forgiven steadiness is included of their taxable revenue.

Types of Income-Driven Repayment Plans

Four main sorts of income-driven compensation plans have been created through the years. Policymakers have usually made newer plans extra favorable to debtors by reducing debtors’ funds, rushing up their loan forgiveness, or subsidizing their curiosity. Some plans had been created for future debtors; others had been out there to present debtors as quickly as they went into impact (see Table 1-1).

Table 1-1.

Income-Driven Repayment Plans

Source: Congressional Budget Office, utilizing info from the Department of Education.

FFEL = Federal Family Education Loan program.

a. Borrowers collaborating within the Public Service Loan Forgiveness program might have their loans forgiven in as little as 10 years.

b. Discretionary revenue is outlined as revenue above the federal poverty guideline.

c. Discretionary revenue is outlined as revenue above 150 % of the federal poverty guideline.

Income-Contingent Repayment. The oldest income-driven plan is the income-contingent compensation (ICR) plan, which was launched in July 1994.

Payments and Forgiveness. Payments within the ICR plan are equal to twenty % of debtors’ discretionary revenue, as much as a cap calculated by multiplying what debtors’ funds can be below a 12-year fixed-payment plan by an “income percentage factor” based mostly on their revenue and marital standing.12 Under the ICR plan, discretionary revenue is outlined as revenue above the federal poverty guideline.13 Unpaid loan balances are forgiven after 25 years.

Eligibility and Enrollment. Only loans made below the direct loan program are eligible for compensation via the ICR plan. That restriction restricted entry to the plan earlier than 2010, when the vast majority of student loans had been originated via the FFEL program.14 Few eligible debtors select the ICR plan at present as a result of different income-driven plans require smaller funds and supply earlier loan forgiveness. Furthermore, debtors can extra simply decide what their month-to-month funds might be below newer income-driven plans, which don’t base their caps on an revenue proportion issue. However, for student debtors with consolidation loans that embrace balances from PLUS loans to oldsters, the ICR plan is the one income-driven plan out there.15

Income-Based Repayment. The income-based compensation (IBR) plan was created below the College Cost Reduction and Access Act of 2007 and have become out there to debtors in July 2009. The plan was amended by the Health Care and Education Reconciliation Act of 2010 for brand new debtors on or after July 1, 2014.

Payments and Forgiveness. The unique model of the IBR plan limits funds to fifteen % of discretionary revenue, capped on the quantity debtors would have paid below the usual compensation plan (a 10-year fixed-payment plan), and provides loan forgiveness after 25 years of compensation. The up to date model limits funds to 10 % of discretionary revenue, topic to the identical cap, and provides loan forgiveness after simply 20 years of compensation. In every case, discretionary revenue is outlined as revenue above 150 % of the federal poverty guideline.

Eligibility and Enrollment. Both direct and FFEL loans will be repaid via the IBR plan. Borrowers are eligible so long as they show that their funds can be decrease than below the 10-year fixed-payment plan. That expanded eligibility, mixed with the IBR plan’s better advantages and ease, in all probability clarify why it had a considerably greater take-up fee than the ICR plan within the decade after it was launched. Both enrollment and the amount of loans within the plan grew quickly over time; nonetheless, new enrollment declined after the introduction of the Pay as You Earn (PAYE) plan, which requires smaller funds and permits for sooner loan forgiveness than the unique IBR plan.

Pay as You Earn. The PAYE plan was created by the Department of Education and have become out there on December 21, 2012.16

Payments and Forgiveness. Required funds are restricted to 10 % of debtors’ discretionary revenue, capped on the quantity debtors would have paid below the usual compensation plan. Discretionary revenue is outlined as family revenue above 150 % of the federal poverty guideline. Loan balances are forgiven after 20 years of compensation.

Eligibility and Enrollment. To qualify for the PAYE plan, students will need to have borrowed for the primary time on or after October 1, 2007; will need to have acquired a disbursement of a direct loan on or after October 1, 2011; and should show that their funds can be decrease below the PAYE plan than below the 10-year fixed-­fee plan. Consolidation loans that embrace PLUS loans to oldsters usually are not eligible for PAYE.

Revised Pay as You Earn. The REPAYE plan was additionally created by the Department of Education and have become out there on December 17, 2015.17

READ:   How It Affects Federal Student Aid – Forbes Advisor

Payments and Forgiveness. The REPAYE plan limits funds to 10 % of debtors’ discretionary revenue, outlined as revenue above 150 % of the federal poverty guideline. Unlike within the different income-driven plans, the fee quantity isn’t capped. Loan balances are forgiven after 20 years for undergraduate debtors and 25 years for graduate debtors.

The REPAYE plan differs from different plans as a result of married debtors should pay 10 % of their family’s discretionary revenue even when they and their partner file taxes individually. In different income-driven plans, married debtors who file individually pay a proportion of their particular person discretionary revenue.

All debtors within the REPAYE plan are eligible for an curiosity subsidy, which reduces the unpaid curiosity added to their loan steadiness by half. That subsidy limits the expansion of the loan steadiness for debtors with very low earnings.

Eligibility and Enrollment. All direct loans are eligible for compensation via the REPAYE plan aside from PLUS loans to oldsters or consolidation loans that embrace such loans.

How Borrowers Enroll in Income-Driven Repayment Plans

Borrowers enroll in income-driven plans by submitting an software to their loan servicer. (Servicers are personal firms with federal contracts to gather loan funds, keep information, and talk with debtors.) The software asks debtors to report whether or not their family has revenue. If it does, debtors are requested to doc their adjusted gross revenue (AGI) from their most up-to-date tax return or to supply extra present documentation if their revenue has considerably modified since their final tax submitting.18 Borrowers are additionally requested to report their family measurement, which is used to find out the federal poverty guideline that applies to their family. Once functions are submitted, the servicer evaluations them to find out whether or not debtors are eligible.19 Borrowers should report their revenue and family measurement annually in order that their required fee will be up to date.20 Borrowers may request to have their funds recalculated at any time if their family revenue or measurement modifications.

Repayment Schedules Under Income-Driven Repayment and Standard Fixed-Payment Plans

The earnings and loan balances of debtors in income-driven plans decide their required funds over time—together with whether or not they may repay their loans in full or have a few of their steadiness forgiven. Those components additionally decide whether or not loans repaid via such plans end in better prices to the federal government.

Consider two debtors who’ve simply graduated, every with an revenue of $40,000, which grows by 3 % yearly. The first borrower has a loan steadiness of $25,000, and the second has a loan steadiness of $50,000. The first borrower’s annual funds would initially be decrease below the PAYE plan than below the usual compensation plan (a 10-year fixed-payment plan; see Figure 1-1, prime left panel). The borrower would repay the loan in full below both compensation schedule, however it might take 5 years longer below the PAYE plan (see Figure 1-1, prime proper panel).

Figure 1-1.

Repayment Schedules for Two Hypothetical Borrowers, by Type of Repayment Plan

Thousands of Dollars

Source: Congressional Budget Office.

In CBO’s calculations, the debtors’ earnings enhance yearly by 3 %, and the loans have an rate of interest of 6 %.

In the PAYE plan, month-to-month funds are capped on the quantity debtors would pay in a 10-year fixed-payment plan.

PAYE = Pay as You Earn.

Under both compensation schedule, the current worth of the money flows from compensation would exceed the quantity disbursed for the loan. In different phrases, the loan would generate a web achieve for the federal government. But the current worth of these money flows can be bigger below the PAYE plan as a result of the loan would accrue extra curiosity over the compensation interval.21 Specifically, the subsidy fee for the loan—its general price as a proportion of the preliminary steadiness—can be −15.2 % below the PAYE plan and −10.2 % below the fixed-payment plan.

The second borrower’s annual compensation quantities can be decrease below the PAYE plan than below the fixed-­fee plan during compensation (see Figure 1-1, backside left panel). Moreover, as a result of the funds within the PAYE plan would initially be lower than the accruing curiosity, the loan steadiness would develop through the borrower’s first 10 years in compensation (see Figure 1-1, backside proper panel). The borrower wouldn’t repay the loan in full and would as a substitute obtain forgiveness after 20 years of compensation. Overall, the loan would end in a web price to the federal government below the income-driven plan however not the usual fixed-­fee plan. Specifically, the lifetime price to the federal government can be 19.7 % of the initially disbursed quantity below the income-driven plan and −10.2 % of the initially disbursed quantity below the fixed-­fee plan. (See Appendix A for a proof of how CBO calculated current values when estimating loan subsidies.)

Effects of Income-Driven Repayment Plans on Spending

Currently, student loans repaid via income-driven plans, as a complete, are estimated to have a bigger price than loans repaid via fixed-payment plans.22 Different features of compensation in income-driven plans have totally different results on prices.

Income-driven plans have a tendency to extend a loan’s excellent steadiness by extending its compensation. Because curiosity is collected on a bigger steadiness for an extended time period, the loan accrues extra curiosity. Later funds are discounted to replicate that they’re much less useful than earlier funds, however as a result of the rate of interest on the loan is usually greater than the low cost fee, the worth of the extra curiosity outweighs that impact. As a outcome, income-driven plans scale back a loan’s price to the federal government when many of the unique steadiness is repaid. (The extra curiosity acquired by the federal government is partly offset via tax deductions; these results are described under. In the funds, nonetheless, estimates of the subsidy prices of the student loan program exclude results on tax revenues.)

Loan forgiveness, in contrast, will increase the federal government’s price for student loans repaid via income-driven plans. Forgiven balances characterize missed money flows that might have been collected if compensation phrases had been longer. (The price of loan forgiveness is partly offset via taxes on the forgiven balances. Those results are excluded from estimates of subsidy prices.)

Effects of Income-Driven Repayment Plans on Tax Revenues

Income-driven plans have an effect on tax revenues in two methods. First, student loan debtors can deduct the curiosity they pay on loans from their taxable revenue—and loans repaid via income-driven plans are inclined to accrue extra curiosity, which will increase debtors’ deductions.23 Second, forgiven loan balances are included in debtors’ taxable revenue (except they’re forgiven via the PSLF program). In the funds, tax revenues are recorded within the 12 months they’re collected, in distinction to the subsidy prices of loans, that are recorded within the 12 months loans are issued.

To illustrate how these results on taxes affect the price of loans, CBO included the current worth of tax income modifications in its estimates of subsidy charges for the loans repaid by the 2 hypothetical debtors. For the borrower with the $25,000 loan, accounting for results on taxes will increase the subsidy fee below the fixed-­fee plan by 3.7 proportion factors, to –6.5 %, and will increase the subsidy fee below the income-driven plan by 5.5 proportion factors, to –9.7 %. For the borrower with the $50,000 loan, accounting for such results will increase the subsidy fee below the fixed-­fee plan by 3.5 proportion factors, to –6.7 %; in contrast, it decreases the subsidy fee below the income-driven plan by 1.7 proportion factors, to 18.0 %. In the final case, the subsidy shrinks as a result of the impact of tax revenues from loan forgiveness (a 9.6 percentage-point lower) exceeds the impact of deductions for curiosity (a 7.9 percentage-point enhance).


Chapter 2 Borrowers and Loans in Income-Driven Repayment Plans

Both the variety of debtors and the entire quantity of loans in income-driven plans grew quickly over the previous decade as eligibility expanded and plans with extra favorable phrases had been launched. In 2017, roughly half of eligible debtors’ student debt was being repaid via income-driven plans, and most debtors enrolling in such plans had been choosing the Pay as You Earn or Revised Pay as You Earn plan.

The share of debt repaid via income-driven plans has grown sooner than the share of debtors enrolled in these plans for 2 causes. First, the debtors in income-driven plans are inclined to have bigger unique loan balances than these in fixed-payment plans. For instance, graduate debtors take out a lot bigger loans, on common, and usually tend to enroll in income-driven plans than undergraduate debtors.1 Second, a substantial share of debtors in such plans make funds which are too small to cowl their accruing curiosity, so their loan balances develop over time. Despite their bigger balances and slower compensation, debtors in income-driven plans are much less seemingly than debtors in fixed-payment plans to default on their loans.

Growth within the Share of Borrowers and the Share of Loans

From 2010 to 2017, the share of all debtors repaying direct loans via income-driven plans elevated from 10 % to 27 %. The share of undergraduate debtors in such plans elevated from 11 % (600,000 of 5.6 million debtors) to 24 % (4.6 million of 19.3 million debtors; see Figure 2-1). The share of graduate debtors elevated from 6 % (100,000 of 1.8 million debtors) to 39 % (1.8 million of 4.7 million debtors).

Figure 2-1.

Borrowers With Direct Student Loans, by Type of Repayment Plan, 2010 to 2017

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

Over the identical interval, the share of excellent direct-loan balances in income-driven plans elevated even sooner. Between 2010 and 2017, the entire steadiness of loans in these plans grew from $24 billion, or 12 %, to $384 billion, or 45 %. By 2017, undergraduate debtors had been repaying $153 billion, or 34 %, of their loans via income-driven plans; for graduate debtors, the amount of loans in income-driven plans was $231 billion, or 56 % (see Figure 2-2). Growth within the share of loans in such plans was notably fast after the PAYE plan was launched in December 2012.

Figure 2-2.

Direct Student Loans, by Type of Repayment Plan, 2010 to 2017

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

Changes within the Distribution of Loans Among Income-Driven Repayment Plans

The distribution of excellent loan quantity amongst income-driven plans modified significantly between 2010 and 2017 (see Figure 2-3). Of the entire quantity of loans in income-driven plans, the share within the income-­contingent compensation plan declined from about 80 % to lower than 10 %. By distinction, the share within the income-based compensation plan, which had been launched in 2009, grew shortly, amounting to about half the amount of loans in income-driven plans by 2017. After the introduction of the PAYE and REPAYE plans in December 2012 and December 2015, respectively, the shares of loans in these plans additionally elevated significantly.

Figure 2-3.

Distribution of Student Debt in Income-Driven Repayment Plans, 2010 to 2017

Percent

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

PAYE = Pay as You Earn; REPAYE = Revised Pay as You Earn.

a. Loans on this class are these repaid via the unique income-based compensation plan, which covers debtors who took out loans earlier than July 1, 2014.

b. This class combines loans repaid via the PAYE plan with these repaid via the up to date income-based compensation plan, which covers debtors who first took out loans on or after July 1, 2014, and has very related phrases.

Categorizing debtors into compensation cohorts, or teams based mostly on the 12 months through which they started repaying their loans, makes these traits extra obvious.2 The share of student debt repaid via income-driven plans has risen over time for latest cohorts—those who started repaying loans from 2010 to 2014—and is prone to proceed rising for those who started repaying loans between 2015 and 2017, within the Congressional Budget Office’s evaluation. Among undergraduate debtors in 2017, the share of the unique quantity of loans being repaid via income-driven plans was highest for the 2014 compensation cohort, at 33 % (see Figure 2-4). Among graduate debtors in 2017, that share was highest for the 2015 compensation cohort, at 56 %. (CBO expects shares in later cohorts to exceed these ranges as debtors swap from fixed-­fee to income-driven plans.) Otherwise, the amount of loans has shifted from the unique IBR plan to the PAYE plan and the up to date IBR plan (for brand new debtors on or after July 1, 2014) as debtors in newer cohorts have turn into eligible for these plans.

Figure 2-4.

Percentage of the Disbursed Volume of Loans in Each Income-Driven Plan in 2017, by Borrowers’ First Year of Repayment

Percent

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

PAYE = Pay as You Earn; REPAYE = Revised Pay as You Earn.

a. Loans on this class are these repaid via the unique income-based compensation plan, which covers debtors who took out loans earlier than July 1, 2014.

b. This class combines loans repaid via the PAYE plan with these repaid via the up to date income-based compensation plan, which covers debtors who first took out loans on or after July 1, 2014, and has very related phrases.

Differences Between Borrowers in Income-Driven and Fixed-Payment Plans

Borrowers in income-driven plans have bigger balances, on common, than debtors in fixed-payment plans—primarily as a result of debtors in income-driven plans are inclined to take out bigger loans and to repay these loans extra slowly. However, their default charges are about half as excessive as these of debtors in fixed-payment plans.

Part of the explanation that debtors in income-driven plans are inclined to have bigger loan balances is {that a} disproportionate share of these debtors are graduate students, who borrow extra, on common, than undergraduates. In 2017, graduate debtors comprised 30 % of debtors in income-driven compensation plans however solely 15 % of debtors in fixed-payment plans. Those in income-driven plans had acquired a median of $92,000 of loan disbursements; in contrast, these in fixed-payment plans had acquired $59,000, and undergraduate debtors in income-driven and fixed-payment plans had acquired $25,100 and $18,500, respectively.

Loans are sometimes repaid extra slowly below income-driven plans as a result of the required funds are too small to cowl the accruing curiosity. As a outcome, debtors in such plans usually see their steadiness develop over time fairly than being paid down. For instance, the median steadiness of those that started repaying their loans in 2012 elevated as a proportion of the unique disbursement for six years (see Figure 2-5).3 By the tip of 2017, over 75 % of these debtors owed greater than they’d initially borrowed. By distinction, the median steadiness amongst debtors in fixed-payment plans decreased steadily.

Figure 2-5.

Percentage of Original Balance Remaining for Borrowers Who Began Repaying Loans in 2012, by Type of Repayment Plan

Percent

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

CBO examined debtors who started repaying their loans in 2012 as a result of the variety of debtors and the amount of loans in income-driven plans had begun growing by that 12 months and the debtors’ funds for the subsequent a number of years may very well be noticed. Borrowers who defaulted on their loans had been excluded from the evaluation.

Despite their bigger balances and slower compensation, debtors in income-driven plans default at decrease charges than debtors in fixed-payment plans. Among debtors who started repaying their loans in 2012, those that enrolled in an income-driven plan by the tip of 2013 had been about half as seemingly as these in fixed-payment plans to default on their loans by 2017 (see Figure 2-6).

Figure 2-6.

Cumulative Default Rates of Borrowers Who Began Repaying Loans in 2012, by Type of Repayment Plan

Percent

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

In this determine, debtors are categorized as repaying via an income-driven plan in the event that they had been enrolled in such a plan of their first or second 12 months of compensation.

Borrowers in income-driven plans may very well be much less prone to default for numerous causes. For instance, provided that debtors are robotically enrolled in a 10-year fixed-­fee plan except they choose one other plan, those that select different choices might have better monetary literacy. Alternatively, debtors in income-driven plans could also be much less prone to default as a result of these plans preserve funds at a extra manageable stage when debtors have low revenue.


Chapter 3 The Budgetary Costs of Income-Driven Repayment Plans

The Congressional Budget Office initiatives that $1.05 trillion in student loans might be disbursed between 2020 and 2029, growing the deficit by $10.7 billion throughout that interval.1 That enhance is essentially on account of loans in income-driven compensation plans, that are projected to end in prices to the federal government, fairly than loans in fixed-payment plans, that are projected to end in features. Specifically, CBO initiatives that $490.4 billion in student loans disbursed over the 2020–2029 interval might be repaid via income-driven plans, with a lifetime price to the federal government of $82.9 billion. By distinction, $562.7 billion of loans might be repaid via fixed-payment plans, with a lifetime price of −$72.2 billion.2

To estimate the prices of student loans in income-driven plans, CBO projected the anticipated money flows from these loans over the length of their compensation. To that finish, CBO projected the earnings and ensuing loan funds of debtors enrolled within the plans, utilizing historic info on latest debtors. (For extra particulars on CBO’s analytic technique, see Appendix B.)

Several components clarify the bigger projected prices of loans repaid via income-driven plans. In CBO’s evaluation, debtors who enroll in such plans take out bigger loans and have much less revenue, on common, than debtors in fixed-payment plans. Because funds in income-driven plans are a proportion of the debtors’ revenue, a lot of these debtors are anticipated to make lowered funds. A substantial share of their loans can also be anticipated to be forgiven. For these causes, loans in income-driven compensation plans are projected to have greater subsidy charges—that’s, better prices as a share of loan {dollars} disbursed—than loans in fixed-payment plans over the subsequent 10 years.

How the Cost of Student Loans Is Calculated

CBO calculates the prices of the student loan program following the procedures specified within the Federal Credit Reform Act of 1990. FCRA estimates are used within the federal funds for many credit packages, together with the student loan program. CBO prepares fair-value estimates as properly to supply a extra complete image of the packages’ long-term prices.3 (For details about these estimates, see Box 3-1.) This report focuses on prices estimated below FCRA guidelines as a result of CBO makes use of these estimates in its baseline funds projections.

Box 3-1.

Fair-Value Estimates of the Cost of Student Loans

The Congressional Budget Office measures the prices of the student loan program utilizing two approaches: a typical method based mostly on the procedures required by the Federal Credit Reform Act of 1990 (FCRA) and, when requested, another fair-value method. Under the FCRA method, estimated prices are the typical projected money flows of this system, discounted utilizing rates of interest on Treasury securities, which replicate the price of the debt the federal government points to fund the loans. Under the fair-value method, estimated prices additional replicate the compensation a non-public investor would require to undertake the chance of constructing these loans. In CBO’s view, these estimates are a extra complete measure of the prices of student loans than FCRA estimates.

The prices of the student loan program seem decrease when estimated utilizing FCRA procedures as a result of they don’t embrace the price of market danger, which is the chance that arises as a result of debtors usually tend to default on their debt obligations when the economic system is weak. Fair-value estimates account for the price of that monetary danger as expressed via approximations of market costs—particularly, the upper rates of interest that non-public lenders would cost in the event that they had been to supply loans with related phrases. Fair-value estimates may also help policymakers perceive trade-offs when contemplating some several types of laws.

For federal loans issued to students over the 2020–2029 interval, the typical projected subsidy fee (that’s, the fee as a share of the initially disbursed quantity) is 1 % when measured below the FCRA method however 25 % when measured below the fair-value method (see the desk). The greater fair-value estimate displays the truth that a non-public lender would require debtors to pay an rate of interest that compensated for the market danger related to the loans; the loan is backed within the sense that the federal government costs debtors a decrease fee than they might obtain from personal lenders.

Income-driven plans contain extra market danger than fixed-payment plans due to their formulation for required funds and their forgiveness of debtors’ unpaid balances. If the economic system performs poorly, debtors’ earnings might be extra prone to lower, decreasing their required funds below income-driven plans. Those lowered funds will finally result in extra loan forgiveness. (That extra danger is partly offset as a result of debtors in income-driven plans are much less seemingly than debtors in fixed-payment plans to default on their loans.) Under the FCRA method, the typical projected subsidy fee is −12.8 % for loans in fixed-payment plans and 16.9 % for loans in income-driven plans. Under the fair-value method, the typical projected subsidy fee is 9.1 % for loans in fixed-payment plans and 43.1 % for loans in income-driven plans. The distinction is bigger below the fair-value method as a result of the estimates account for market danger.

Under FCRA, a loan’s lifetime price to the federal government is described as a subsidy. It is measured by projecting the entire anticipated future money flows related to the loan after which discounting these projected money flows to their current worth on the date the loan is disbursed (for an instance, see Appendix A).4 (Discounting displays the truth that a greenback collected sooner or later is much less useful than a greenback at present.) A constructive subsidy signifies that the loan has a web price. A adverse subsidy signifies that the current worth of all future money flows from the loan, together with curiosity and charges, exceeds the federal government’s price of constructing the loan—in different phrases, the loan ends in a web achieve.5

To estimate the price of the student loan program below FCRA, CBO allocates funds from debtors to the loans they took out whereas at school. Borrowers with a number of loans usually make only one month-to-month fee, even when they took out several types of loans in numerous years. For instance, a student pursuing an undergraduate diploma would possibly take out each backed Stafford and unsubsidized Stafford loans over 4 years and repay all of these loans collectively in an income-driven plan. CBO proportionally allocates quantities from such funds to every of the borrower’s unique loans, utilizing weights which are based mostly on every loan’s excellent steadiness and rate of interest.

Student loan compensation plans have an effect on the funds not solely via their subsidy prices however via their impact on tax revenues. In each fixed-payment and income-driven plans, student loan curiosity could also be tax deductible within the tax 12 months through which it’s paid. Those tax deductions scale back federal revenues. In addition, debtors whose loans are forgiven should embrace the unpaid steadiness of their taxable revenue for that 12 months (except the loans are forgiven via the Public Service Loan Forgiveness program). Income taxes forgone via deductions for curiosity funds or collected on forgiven balances usually are not included within the estimated budgetary prices of the income-driven compensation program on this report.

Projected Subsidy Rates for Loans Repaid Through Income-Driven Plans

In CBO’s projections, loans disbursed from 2020 to 2029 and repaid via income-driven plans have a median subsidy fee of 16.9 %. By distinction, loans repaid via fixed-payment plans have a median subsidy fee of −12.8 %. In different phrases, for each greenback spent on loans which are repaid via income-driven plans, the federal government is predicted to lose 16.9 cents, and for each greenback spent on loans which are repaid via fixed-payment plans, it’s anticipated to achieve 12.8 cents.

Estimates of the subsidy price of loans in income-driven plans embrace loans forgiven via the PSLF program. Because the PSLF program accelerates the forgiveness of loans, debtors in this system might make far fewer funds than they in any other case would have. As a outcome, the typical subsidy charges are a lot greater for his or her loans than for different loans in income-driven plans—which pushes up the typical prices for all of the loans.

Projected subsidy charges differ for undergraduate and graduate debtors. Over the 2020–2029 interval, loans in income-driven plans are projected to have common subsidy charges of 15.9 % for undergraduate debtors and 17.5 % for graduate debtors (see Table 3-1). (Appendix C offers separate projections for backed Stafford loans, unsubsidized Stafford loans to undergraduate and graduate students, and PLUS loans to graduate students.)

Table 3-1.

Volume and Subsidy Rates of Loans, by Type of Repayment Plan, 2020 to 2029

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

A subsidy fee displays the federal government’s price for a loan in cents per greenback disbursed. By regulation, the prices of federal student loans are measured utilizing procedures prescribed within the Federal Credit Reform Act of 1990. Subsidy prices don’t embrace the executive prices of disbursing and servicing loans.

Loans in income-driven plans embrace loans that obtain forgiveness via the Public Service Loan Forgiveness program.

a. Values for the amount of loans are cumulative totals; values for subsidy charges are averages.

Projected subsidy charges additionally differ for loans in numerous income-driven compensation plans (see Table 3-2). (For projected subsidy charges for several types of loans, see Appendix C.) In CBO’s projections, loans within the unique income-based compensation plan have the bottom subsidy charges, on common, as a result of that plan requires debtors to pay a bigger share of their earnings for an extended time period than the Pay as You Earn or Revised Pay as You Earn plans. (For this evaluation, CBO excluded loans repaid via the income-contingent compensation plan as a result of only a few latest debtors are enrolled in that plan.)6 Average projected subsidy charges are highest for loans within the PAYE plan.

Table 3-2.

Average Subsidy Rates, by Type of Loan and Repayment Plan, 2020 to 2029

Percent

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

A subsidy fee displays the federal government’s price for a loan in cents per greenback disbursed. By regulation, the prices of federal student loans are measured utilizing procedures prescribed within the Federal Credit Reform Act of 1990. Subsidy prices don’t embrace the executive prices of disbursing and servicing loans.

CBO excluded one fee plan—the income-contingent compensation plan—from its estimates as a result of the share of debtors enrolled in that plan could be very small.

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IBR = income-based compensation; PAYE = Pay as You Earn; REPAYE = Revised Pay as You Earn.

a. Loans on this class are these repaid via the unique income-based compensation plan, which covers debtors who took out loans earlier than July 1, 2014.

b. This class combines loans repaid via the PAYE plan with these repaid via the up to date income-based compensation plan, which covers debtors who first took out loans on or after July 1, 2014, and has very related phrases.

The PAYE and REPAYE plans have related phrases, however two variations make subsidy charges decrease, on common, for loans within the REPAYE plan. First, the PAYE plan caps funds on the quantity a borrower would owe in the usual 10-year fixed-payment plan. By distinction, funds within the REPAYE plan usually are not capped, which signifies that debtors find yourself repaying a bigger share of their principal earlier than their loans are forgiven. Second, all debtors within the PAYE plan obtain loan forgiveness after 20 years of compensation, however for graduate debtors within the REPAYE plan, loan forgiveness takes 25 years. That longer compensation time period reduces the subsidy charges for graduate debtors’ loans. A 3rd distinction partly offsets these two results: The REPAYE plan’s curiosity subsidy reduces debtors’ unpaid curiosity by half, which reduces some debtors’ complete funds.

Forgiveness of Loans in Income-Driven Plans

Because loan forgiveness ends debtors’ funds, it reduces money flows to the federal government and raises the subsidy price of the student loan program. Borrowers in income-driven plans obtain forgiveness of their excellent balances after 20 or 25 years of qualifying funds. Borrowers within the PSLF program obtain forgiveness after 10 years of funds in the event that they work for public-service employers all through that interval.

CBO initiatives {that a} better share of graduate debtors’ loans than undergraduate debtors’ loans might be forgiven. Graduate debtors are projected to carry 50 % of the amount of student loans disbursed from 2020 to 2029—together with 61 % of the amount of loans in income-driven plans—however to account for 81 % of the quantity that’s forgiven.

For loans disbursed to undergraduate students between 2020 and 2029, CBO estimates that an excellent steadiness of $40.3 billion, in present-value phrases, will in the end be forgiven.7 For loans made to graduate students over the identical interval, CBO estimates that the forgiven steadiness might be a lot bigger, amounting to $167.1 billion in present-value phrases. Those forgiven balances characterize 21 % of the quantity disbursed to undergraduate debtors and 56 % of the quantity disbursed to graduate debtors (see Table 3-3). For comparability, the current worth of the funds on these loans is projected to equal 84 % of the quantity disbursed to undergraduate debtors and 82 % of the quantity disbursed to graduate debtors.8 (See Appendix C for separate projections for backed Stafford loans, unsubsidized Stafford loans to undergraduate and graduate students, and PLUS loans to graduate students.)

Table 3-3.

Disbursed, Forgiven, and Paid Amounts of Loans Issued From 2020 to 2029 and Repaid Through Income-Driven Plans

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

Loans in income-driven plans embrace loans which are forgiven via the Public Service Loan Forgiveness program.

Forgiven debt and funds are expressed as current values. To calculate these current values, CBO used the rates of interest on Treasury securities to translate future money flows into present {dollars} within the years loans can be disbursed.

Forgiven balances and funds add as much as greater than one hundred pc as a result of they embrace accrued curiosity.

a. Values for disbursements and forgiven balances are cumulative totals; values for the proportion of disbursements forgiven or repaid are averages.

Differences by Borrowers’ Academic Level

The distinction in projected loan forgiveness for undergraduate and graduate debtors is pushed by two components. First, graduate students borrow rather more, on common, than undergraduate students. Although graduate debtors are additionally projected to have better lifetime earnings, CBO expects {that a} bigger share of these debtors could have revenue too low to totally repay their loans via income-driven plans. Second, rates of interest are significantly greater for loans to graduate students than loans to undergraduate students. Compared with Stafford loans to undergraduate students, Stafford loans to graduate students have rates of interest which are 1.55 proportion factors greater, and PLUS loans to graduate students have rates of interest which are 2.55 proportion factors greater. Those greater rates of interest trigger unpaid curiosity to accrue at sooner charges for graduate students’ loans.

That sooner accrual of curiosity, mixed with required funds that don’t cowl the accruing curiosity, can lead graduate debtors’ debt burden to extend over time. As a outcome, CBO expects that graduate debtors in income-driven plans might be extra seemingly than undergraduate debtors to have excellent balances bigger than the quantity they initially borrowed—at the very least within the preliminary years of compensation. Such debtors are additionally prone to have extra debt forgiven.

Differences by Borrowers’ Original Balances and Earnings

On common, debtors who take out bigger loans are projected to have a bigger share of their unique steadiness forgiven. CBO initiatives that over the 2020–2029 interval, undergraduate debtors who take out the smallest loans (these within the lowest quintile, or fifth, of the distribution of unique loan balances) could have a median of $40, or 1 % of the disbursed quantity, forgiven; for graduate debtors, that quantity is $700, or 2 % of the disbursed quantity. (Those quintiles embrace debtors in fixed-payment plans, who essentially obtain no forgiveness.) By distinction, undergraduate debtors who take out the most important loans (these within the highest quintile) are projected to have a median of $6,000, or 12 % of the disbursed quantity, forgiven; for graduate debtors, that quantity is $118,000, or 53 % of the disbursed quantity.

In addition, amongst students who borrow related quantities, these with decrease earnings are projected to have a better share of their loans forgiven (see Figure 3-1). For occasion, amongst graduate students who take out the most important loans, these with the bottom earnings (within the backside quintile of the distribution of earnings) are projected to have a median of $161,000, or 77 % of their disbursed quantity, forgiven, whereas these with the best earnings (within the prime quintile) are projected to have a median of $57,000, or 21 % of their disbursed quantity, forgiven.

Figure 3-1.

Forgiveness of Loans Issued From 2020 to 2029, by Borrowers’ Projected Earnings and Original Balance

Source: Congressional Budget Office.

Each sq. represents debtors in a single quintile, or fifth, of the distribution of projected earnings and one quintile of the distribution of unique loan balances. Those quintiles embrace debtors in fixed-payment plans, who usually are not eligible for loan forgiveness, and debtors within the Public Service Loan Forgiveness program.

Earnings and unique loan balances had been measured in 2020 {dollars}. Forgiven quantities had been discounted to their current worth within the 12 months of the loans’ disbursement, utilizing the rates of interest on Treasury securities.

Earnings had been calculated as projected common annual earnings inside the first 20 years after debtors started repaying their loans. Earnings within the lowest quintile are below $22,000 per 12 months for undergraduate debtors and below $40,000 per 12 months for graduate debtors; earnings within the highest quintile are $69,000 or extra per 12 months for undergraduate debtors and $114,000 or extra per 12 months for graduate debtors.

Original loan balances within the lowest quintile are $6,000 or much less for undergraduate debtors and $37,000 or much less for graduate debtors. Original loan balances within the highest quintile are over $32,000 for undergraduate debtors and over $122,000 for graduate debtors.

Accounting for variations within the measurement of loans, CBO additionally expects a better share of forgiven student debt to be held by debtors with the bottom earnings (see Figure 3-2). However, that sample is weaker for graduate debtors with massive loans. Among graduate debtors who take out the most important loans (totaling $122,000 or extra), these with the best earnings (above $114,000 per 12 months) are projected to carry 9 % of the forgiven debt. By distinction, amongst undergraduate debtors who take out the most important loans (totaling $32,000 or extra), these with the best earnings (above $69,000 per 12 months) are projected to carry solely 3 % of the forgiven debt.

Figure 3-2.

Distribution of Forgiven Student Debt Issued From 2020 to 2029, by Borrowers’ Projected Earnings and Original Balance

Percent

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

Each borrower is grouped into one quintile, or fifth, of the distribution of projected earnings and one quintile of the distribution of unique loan balances. Those quintiles embrace debtors in fixed-payment plans, who usually are not eligible for loan forgiveness, and debtors within the Public Service Loan Forgiveness program.

Earnings and unique loan balances had been measured in 2020 {dollars}. Forgiven quantities had been discounted to their current worth within the 12 months of the loans’ disbursement, utilizing the rates of interest on Treasury securities.

Earnings had been calculated as projected common annual earnings inside the first 20 years after debtors started repaying their loans. Earnings within the lowest quintile are below $22,000 per 12 months for undergraduate debtors and below $40,000 per 12 months for graduate debtors; earnings within the highest quintile are $69,000 or extra per 12 months for undergraduate debtors and $114,000 or extra per 12 months for graduate debtors.

Original loan balances within the lowest quintile are $6,000 or much less for undergraduate debtors and $37,000 or much less for graduate debtors. Original loan balances within the highest quintile are over $32,000 for undergraduate debtors and over $122,000 for graduate debtors.

Effects of Loan Forgiveness on Tax Revenues

Although loan forgiveness stops a borrower’s funds, it nonetheless ends in tax revenues most often as a result of the forgiven quantity is included within the borrower’s taxable revenue. In the funds, the consequences of tax revenues are recorded within the 12 months these taxes are collected. Taxes on the forgiven balances of loans issued between 2020 and 2029 might be collected in 2040 on the earliest. Thus, CBO’s estimates of the prices of student loans exclude these results.

However, together with these results in estimates of the loans’ lifetime prices to the federal government may very well be informative to policymakers. In CBO’s evaluation, doing so would scale back the typical subsidy fee of loans in income-driven plans.

To approximate the current worth of revenues from forgiven loans, one would multiply the typical efficient tax fee that might apply to the forgiven balances included in debtors’ revenue by the current worth of these balances.9 For instance, if the typical efficient tax fee can be 20 % and the current worth of the forgiven balances was equal to 50 % of the unique loans, then the current worth of the anticipated tax revenues from forgiveness would equal 10 % of the disbursed quantity. Thus, together with these revenues within the subsidy estimate would scale back the subsidy fee by 10 proportion factors.10 (That calculation can’t be instantly utilized to the ends in Table 3-3 as a result of the forgiven quantities proven there embrace balances forgiven below the PSLF program, which aren’t taxable.)


Chapter 4 Policy Options

The Congressional Budget Office analyzed two broad units of coverage choices that might modify income-driven compensation plans: choices that might change the supply of such plans and choices that might change how debtors’ required funds are calculated. The choices CBO analyzed are both just like insurance policies lawmakers have thought of prior to now or helpful for illustrating how sure features of the plans have an effect on the funds. CBO estimated how every of the choices would have an effect on the price of the student loan program over the subsequent 10 years, utilizing procedures prescribed by the Federal Credit Reform Act of 1990.1 (Estimates of the choices’ prices on a fair-value foundation can be found as supplemental materials accompanying this report.)

The choices within the first class would change the supply of income-driven plans by:

  • Making the Revised Pay as You Earn plan the one income-driven compensation plan,
  • Making that plan the one compensation plan within the student loan program, or
  • Eliminating income-driven compensation plans altogether.

All of the choices within the second class can be mixed with that first possibility—making the REPAYE plan the one income-driven compensation plan—and would change debtors’ funds by:

  • Adjusting the share of discretionary revenue used to calculate required loan funds,
  • Adjusting the definition of discretionary revenue, or
  • Adjusting the timing of loan forgiveness.

The prices of the choices within the first class are measured in relation to CBO’s August 2019 baseline projections. The prices of choices within the second class are measured in relation to the price of the primary possibility.

Considerable uncertainty surrounds the budgetary results of all of the choices. In common, CBO expects that debtors can be extra prone to enroll in income-driven plans below insurance policies that made the phrases extra favorable and fewer prone to enroll below insurance policies that made the phrases much less favorable. CBO adjusted the estimated prices of loans below the choices to account for such behavioral results. However, every possibility might alter students’ incentives and have an effect on whether or not they took out loans, how a lot they borrowed, or whether or not they selected to attend faculty in any respect.2 That is very true for the choices that might result in essentially the most dramatic modifications (eliminating income-driven compensation plans or making the REPAYE plan obligatory). Most of the estimates on this report don’t account for these complicated components. (The solely exception is the estimate for the coverage to remove all income-driven compensation plans, which includes a small lower in borrowing for graduate faculty.)

Costs are introduced individually for loans to undergraduate students and loans to graduate students. Approximate prices of insurance policies that might have an effect on undergraduate and graduate students otherwise will be estimated by combining the price of one coverage for undergraduate students with the price of one other for graduate students. For instance, the price of expediting loan forgiveness for undergraduate debtors and delaying it for graduate debtors will be approximated by combining the corresponding estimates.3

Options That Would Change the Availability of Income-Driven Repayment Plans

The three choices examined right here would simplify income-driven compensation, broaden the usage of income-driven compensation plans, or remove them altogether. Each of the insurance policies would apply to debtors who took out their first loan on or after July 1, 2020. The impact of the insurance policies would enhance over time as a better share of loans was held by these debtors.

The first two choices would make the REPAYE plan the one income-driven plan. CBO targeted on that plan as a result of it’s the latest income-driven compensation plan and since, like plans proposed within the President’s funds for fiscal 12 months 2020 and by the Promoting Real Opportunity, Success, and Prosperity via Education Reform (PROSPER) Act (H.R. 4508), Aim Higher Act (H.R. 6543), and College Affordability Act (H.R. 4674), it doesn’t cap debtors’ funds.

Make the REPAYE Plan the Only Income-Driven Repayment Plan

Many coverage proposals have sought to simplify income-driven compensation by lowering debtors’ choices to a single income-driven plan.4 Some debtors are eligible for 3 or 4 totally different plans, and difficulties in selecting one might discourage these debtors from enrolling in any of them. Under this selection, the REPAYE plan can be the one income-driven plan out there to debtors who took out their first loan on or after July 1, 2020.

Under this selection, the subsidy (or lifetime price to the federal government) of loans issued from 2020 to 2029 would fall by $22.7 billion, in CBO’s estimation—$4.4 billion for undergraduate debtors’ loans and $18.3 billion for graduate debtors’ loans (see Table 4-1). Costs would fall as a result of, in CBO’s evaluation, most new debtors would in any other case have enrolled within the PAYE plan, and subsidy charges for loans in that plan are about 5 proportion factors greater, on common, than for loans repaid via the REPAYE plan. (In different phrases, for every greenback disbursed, the federal government spends about 5 cents much less for loans which are repaid via the REPAYE plan.) In 2029, the coverage would apply to virtually all new loans as a result of virtually all debtors in that 12 months would have first borrowed after July 1, 2020, as required for the coverage to use. Average subsidy charges can be 1.1 proportion factors decrease for undergraduate debtors’ loans and 5.3 proportion factors decrease for graduate debtors’ loans (see Table 4-2).

Table 4-1.

Change within the Subsidy Cost of Student Loans Under Options That Would Change Income-Driven Repayment, 2020 to 2029

Billions of Dollars

Source: Congressional Budget Office.

All choices would take impact for brand new debtors on or after July 1, 2020.

By regulation, the prices of federal student loans are measured utilizing procedures prescribed within the Federal Credit Reform Act of 1990. Subsidy prices don’t embrace the executive prices of disbursing and servicing loans.

AGI = adjusted gross revenue; REPAYE = Revised Pay as You Earn.

a. Measured in relation to CBO’s August 2019 baseline funds projections.

b. Measured in relation to projected prices below the primary possibility, “Make REPAYE the Only Income-Driven Repayment Plan.”

Table 4-2.

Change within the Subsidy Rate for Student Loans Under Options That Would Change Income-Driven Repayment, 2020 to 2029

Percentage Points

Source: Congressional Budget Office.

All choices would take impact for brand new debtors on or after July 1, 2020.

A subsidy fee displays the federal government’s price for a loan in cents per greenback disbursed. By regulation, the prices of federal student loans are measured utilizing procedures prescribed within the Federal Credit Reform Act of 1990. Subsidy prices don’t embrace the executive prices of disbursing and servicing loans.

AGI = adjusted gross revenue; REPAYE = Revised Pay as You Earn.

a. Measured in relation to CBO’s August 2019 baseline funds projections.

b. Measured in relation to projected prices below the primary possibility, “Make REPAYE the Only Income-Driven Repayment Plan.”

Make the REPAYE Plan the Only Repayment Plan

Under present regulation, if debtors don’t choose a plan in the beginning of their compensation interval, they’re robotically enrolled in the usual compensation plan, through which debtors totally repay their loan steadiness after 10 years of fastened month-to-month funds. Borrowers can choose different plans for which they’re eligible, however some analysis has instructed that debtors usually are not conscious of their choices. In 2015, for instance, the Government Accountability Office suggested the Department of Education to persistently and recurrently notify debtors about income-driven compensation plans as a result of many debtors who would profit from the plans weren’t collaborating in them.5

Under this selection, debtors who took out their first loan on or after July 1, 2020, would robotically be enrolled within the REPAYE plan when their compensation interval started and couldn’t select every other plan. The coverage would make the student loan program extra just like the student loan packages of nations comparable to Australia and the United Kingdom, the place the one out there compensation plans are income-driven plans (see ). It would additionally forestall debtors who would profit from such plans from failing to enroll due to a lack of expertise.

In CBO’s estimation, making the REPAYE plan the one compensation plan would enhance the subsidy price of loans disbursed over the 2020–2029 interval by $33.5 billion—$16.0 billion for loans to undergraduate students and $17.6 billion for loans to graduate students (see Table 4-1). In 2029, when the coverage would apply to virtually all new loans, the typical subsidy charges for loans to undergraduate and graduate students can be 4.8 and 4.9 proportion factors greater, respectively (see Table 4-2). Subsidy prices would rise below this selection as a result of some debtors who in any other case would have enrolled in fixed-payment plans would repay their loans extra slowly within the REPAYE plan and will have a few of their debt forgiven. In CBO’s evaluation, nonetheless, debtors who enroll in fixed-payment plans below present regulation borrow much less and earn extra, on common, than these in income-driven plans. For that motive, CBO expects that they might be extra prone to totally repay their loans within the REPAYE plan, which might restrict the general enhance in subsidy prices. To simplify the evaluation, CBO modeled debtors as all the time recertifying their revenue and making their required funds (fairly than non-compulsory, bigger funds).

Instead of eliminating the opposite fee plans, policymakers would possibly desire to make the REPAYE plan the default plan, like the usual fixed-payment plan below present regulation. In that case, debtors would robotically be enrolled within the REPAYE plan when their compensation interval started except they chose another. In CBO’s evaluation, that coverage would have a better price to the federal government than this selection as a result of it might enable debtors to pick the plan with essentially the most favorable phrases—and thus the most important subsidy—based mostly on their anticipated earnings.

Eliminate All Income-Driven Repayment Plans

Under this selection, income-driven compensation plans would now not be out there for debtors who took out their first loan on or after July 1, 2020. CBO analyzed this selection to supply an estimate of the entire price of income-driven compensation plans, which might be equal to the financial savings that might come from eliminating them. The estimated prices of this selection are very unsure as a result of the coverage is a major departure from present regulation. One supply of uncertainty is the extent of the decline in borrowing: Some debtors may not take out loans and even attend school within the absence of income-driven plans.

In CBO’s estimation, eliminating income-driven plans would scale back the subsidy price of student loans over the 2020–2029 interval by $122.0 billion—$25.1 billion for loans to undergraduate students and $96.9 billion for loans to graduate students (see Table 4-1). (The latter estimate incorporates a small decline in borrowing by graduate students over the 2020–2029 interval. Because their loans would have a adverse common subsidy fee, that decline in borrowing reduces the federal government’s web achieve from the coverage.) In 2029, when the coverage would apply to virtually all new loans, common subsidy charges can be 6.3 proportion factors decrease for loans to undergraduate students and 27.3 proportion factors decrease for loans to graduate students (see Table 4-2). Subsidy prices would fall as a result of eliminating income-driven plans would finish debt forgiveness. CBO additionally expects that many debtors who in any other case would have enrolled in such plans would choose fixed-payment plans with prolonged phrases to decrease their required funds. Those debtors would accrue and pay extra curiosity than debtors in 10-year plans, additional lowering the subsidy price for his or her loans. However, as a result of debtors who at the moment enroll in income-driven plans are inclined to borrow extra and earn lower than debtors in fixed-payment plans, CBO anticipated that they might be extra prone to default on their loans in a fixed-payment plan, which might partly offset the discount in prices.

Options That Would Change How Borrowers’ Payments Are Calculated

CBO examined three choices that might change debtors’ required funds by altering the share of discretionary revenue used to calculate these funds, altering the definition of discretionary revenue, or altering the timing of loan forgiveness. Each of the insurance policies would apply to debtors who took out their first loan on or after July 1, 2020. Over time, as extra of these debtors started repaying their loans, the consequences of every coverage would enhance.

To simplify the evaluation and align the choices with lately proposed insurance policies, CBO thought of the REPAYE plan to be the one income-driven plan out there below all three choices. Therefore, every possibility’s budgetary results are measured in relation to prices below the primary possibility from the earlier set. The prices are introduced that approach to isolate the consequences of adjusting debtors’ funds from the consequences of constructing the REPAYE plan the one income-driven plan. (In a price estimate, CBO would measure the consequences of the insurance policies towards its baseline funds projections.)6 For every possibility, CBO examined the consequences of equal however reverse modifications to at least one parameter of the REPAYE plan.

Adjust the Share of Discretionary Income Used to Calculate Monthly Payments

Under the REPAYE plan, debtors’ required month-to-month funds are 10 % of their discretionary revenue. Recently proposed insurance policies would alter that share.7 CBO analyzed the consequences of both growing or reducing the share by 2 proportion factors, in order that funds would equal 12 % or 8 % of debtors’ discretionary revenue. In every case, the coverage would apply to debtors who took out their first loan on or after July 1, 2020, and the REPAYE plan can be the one out there income-driven plan for these debtors. Unlike different income-driven plans, the REPAYE plan doesn’t cap funds on the quantity a borrower would pay below a 10-year fixed-payment plan. Therefore, funds would change for all debtors with discretionary revenue—together with these with excessive ranges of revenue.

If required funds had been 12 % of debtors’ discretionary revenue, the subsidy price of loans in income-driven plans over the 2020–2029 interval would fall by $19.0 billion—$4.0 billion for loans to undergraduate students and $15.1 billion for loans to graduate students, in CBO’s estimation (see Table 4-1). In 2029, when the coverage would apply to virtually all new loans, common subsidy charges can be 0.9 proportion factors decrease for undergraduate debtors’ loans and 4.1 proportion factors decrease for graduate debtors’ loans (see Table 4-2). By distinction, if required funds had been 8 % of debtors’ discretionary revenue, the subsidy price of loans in income-driven plans would rise by $26.4 billion—$5.8 billion for loans to undergraduate students and $20.7 billion for loans to graduate students. In 2029, when the coverage would apply to virtually all new loans, common subsidy charges can be 1.3 proportion factors greater for loans to undergraduate students and 5.5 proportion factors greater for loans to graduate students.

Increasing the share of discretionary revenue used to calculate debtors’ funds would have smaller results, in absolute phrases, than reducing that share. That is as a result of growing debtors’ funds would trigger a few of them to repay their balances sooner, which implies they might pay much less curiosity on their loans.

Adjust the Definition of Discretionary Income

In income-driven compensation plans, debtors’ funds are a proportion of their discretionary revenue. Discretionary revenue, which is supposed to replicate revenue after important bills (comparable to housing, meals, and taxes), is usually outlined as adjusted gross revenue above 150 % of the federal poverty guideline for a borrower’s family. Policymakers have thought of altering that definition lately.8

CBO analyzed the consequences of defining discretionary revenue as AGI over 125 % of the federal poverty guideline or AGI over 175 % of the federal poverty guideline. In every case, the coverage would apply to debtors who took out their first loan on or after July 1, 2020, and the REPAYE plan can be the one out there income-driven plan for these debtors.

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To perceive how the insurance policies would change debtors’ funds, think about that the federal poverty guideline in a given 12 months is $20,000 for a hypothetical borrower with an AGI of $40,000. Under the REPAYE plan, that borrower would have $30,000 (150 % of $20,000) for important bills, $10,000 in discretionary revenue, and $1,000 in loan funds. If the share of AGI excluded from discretionary revenue fell to 125 % of the federal poverty guideline, the borrower would have $25,000 (125 % of $20,000) for important bills, $15,000 in discretionary revenue, and $1,500 in funds. If the share rose to 175 % of the federal poverty guideline, the borrower would have $35,000 (175 % of $20,000) for important bills, $5,000 in discretionary revenue, and $500 in funds.

In CBO’s estimation, defining discretionary revenue as AGI over 125 % of the federal poverty guideline would lower the subsidy price of student loans issued over the 2020–2029 interval by $12.7 billion—$3.9 billion for loans to undergraduate students and $8.8 billion for loans to graduate students (see Table 4-1). In 2029, when the coverage would apply to virtually all new loans, the typical subsidy fee for undergraduate debtors’ loans can be 1.0 proportion level decrease, and the typical subsidy fee for graduate debtors’ loans can be 2.4 proportion factors decrease (see Table 4-2).By distinction, CBO estimates that defining discretionary revenue as AGI over 175 % of the federal poverty guideline would enhance the subsidy price of these loans by $16.7 billion—$4.4 billion for loans to undergraduate students and $12.3 billion for loans to graduate students. In 2029, when the coverage would apply to virtually all new loans, the typical subsidy fee for undergraduate debtors’ loans can be 1.1 proportion factors greater, and the typical subsidy fee for graduate debtors’ loans can be 3.3 proportion factors greater.

The financial savings from reducing the quantity of debtors’ revenue that was thought of discretionary can be barely smaller, in absolute phrases, than the prices of accelerating that share. That is as a result of growing debtors’ required funds would trigger some debtors to repay their balances sooner, which implies they might pay much less curiosity on their loans.

Adjust the Timing of Loan Forgiveness

The totally different income-driven compensation plans fluctuate how lengthy debtors should make funds earlier than their loans are forgiven. Both the income-contingent compensation plan and the unique income-based compensation plan require debtors to make funds for 25 years earlier than receiving loan forgiveness. That time was lowered to twenty years within the PAYE and up to date IBR plans. The most lately launched plan, the REPAYE plan, has totally different compensation phrases for undergraduate and graduate debtors—20 years and 25 years, respectively. Policymakers have thought of adjusting the timing of loan forgiveness in different methods.9

CBO analyzed how the prices of student loans would change if loan forgiveness was delayed or accelerated by 5 years. In every case, the coverage would apply to debtors who took out their first loans on or after July 1, 2020, and the REPAYE plan can be the one out there income-driven plan for these debtors.

Delaying the forgiveness of student loans by 5 years would lower their subsidy price over the 2020–2029 interval by $17.2 billion—$3.0 billion for loans to undergraduate students and $14.1 billion for loans to graduate students (see Table 4-1). Borrowers who took out loans just for undergraduate research would have their loans forgiven after 25 years of compensation, and debtors who took out loans for graduate research would have their loans forgiven after 30 years. In 2029, when the coverage would apply to virtually all new loans, common subsidy charges can be 0.7 proportion factors decrease for undergraduate debtors’ loans and three.8 proportion factors decrease for graduate debtors’ loans (see Table 4-2).By distinction, CBO estimates that accelerating the forgiveness of student loans by 5 years would enhance their subsidy price over the 2020–2029 interval by $28.7 billion—$6.0 billion for loans to undergraduate students and $22.7 billion for loans to graduate students. Borrowers who took out loans just for undergraduate research would have their loans forgiven after 15 years of compensation, and debtors who took out loans for graduate research would have their loans forgiven after 20 years. In 2029, when the coverage would apply to virtually all new loans, common subsidy charges can be 1.3 proportion factors greater for undergraduate debtors’ loans and 6.0 proportion factors greater for graduate debtors’ loans.

The financial savings from delaying loan forgiveness can be smaller, in absolute phrases, than the prices of accelerating it for 2 major causes. First, funds that can happen after 25 or 30 years of compensation are price much less, when discounted to current values, than funds that can happen after 15 or 20 years.10 Second, growing the time to forgiveness would trigger some debtors to totally repay their loan steadiness. Therefore, CBO expects that fewer funds can be made on the finish of the compensation time period if it was longer.


Appendix A Present-Value Calculations

To estimate the subsidy price of a student loan, as outlined by the Federal Credit Reform Act of 1990 (FCRA), the Congressional Budget Office reductions related money flows to their current worth on the date the loan is disbursed. Expressing the price of a loan as a present-value subsidy means it may be recorded within the funds within the 12 months the loan is issued, which makes it simpler to check the budgetary results of assured and direct loans or loans and different types of help, comparable to grants.

Subsidies are calculated by summing the current values of the federal government’s money outflows and inflows. The loan disbursement is the primary outflow, and the borrower’s funds are the primary inflows. Under FCRA accounting, the outflows and inflows are discounted to current values utilizing rates of interest on Treasury securities from the 12 months of the loan’s disbursement with maturities that match the timing of the money flows. For instance, the loan disbursement isn’t discounted, funds which are acquired within the following 12 months are discounted on the 1-year fee, and funds which are acquired 10 years after the disbursement are discounted on the 10-year fee. The charges are based mostly on “zero-coupon” Treasury securities, which pay no curiosity, solely a lump sum at maturity.1

Although they don’t seem to be a part of the subsidy calculation, this report contains estimates of forgiven balances discounted utilizing FCRA procedures. Discounting makes it simpler to check forgiven balances, which can embrace massive quantities of unpaid curiosity, with disbursed quantities. The discounted forgiven quantity reveals how a lot decrease the subsidy can be if debtors totally paid off their debt within the 12 months it was forgiven.

To illustrate these ideas, take into account the case from Chapter 1 of a hypothetical borrower repaying a $50,000 loan via the Pay as You Earn plan (see Table A-1). The loan in that instance has an rate of interest of 6 %, which might be in line with the rate of interest on an undergraduate Stafford loan issued when the 10-year Treasury word fee was roughly 4 %. (Undergraduate Stafford loans for a given tutorial 12 months have an rate of interest 2.05 proportion factors greater than the excessive yield of the 10-year Treasury word from the final public sale earlier than the earlier June.) To simplify the evaluation, CBO used a single low cost fee of 4 %.

Table A-1.

Discounted Payments and Forgiven Balance for a Hypothetical Borrower

Dollars

Source: Congressional Budget Office.

In CBO’s calculation, the borrower begins repaying the loan with an revenue of $40,000, which will increase yearly by 3 %. The loans have an rate of interest of 6 %.

The borrower on this instance makes funds below the Pay as You Earn plan.

The low cost fee is 4 %.

CBO discounted funds and the forgiven steadiness by dividing their worth by 1.04t, the place t is the variety of years after the loan’s disbursement.

n.a. = not relevant.

The loan’s subsidy is the same as the current worth of the disbursement (column A in Table A-1) minus the current worth of the funds (column E): $9,862. The subsidy fee is the subsidy divided by the disbursement: 19.7 %. (Subsidy charges point out a loan’s price to the federal government in cents per greenback disbursed, which permits for simpler comparisons of loan packages of various sizes.) In the twentieth 12 months of compensation, the borrower receives forgiveness for an unpaid steadiness of $47,999 (column D), which has a gift worth of $21,906 (column F). As a proportion of the disbursement, the current worth of the forgiven quantity is 44 %.


Appendix B CBO’s Approach to Estimating the Cash Flows of Loans in Income-Driven Repayment Plans

Cash flows in income-driven compensation plans rely on debtors’ family revenue and family measurement. Therefore, to undertaking the prices of income-driven plans, the Congressional Budget Office projected family revenue and measurement for debtors who would enroll in these plans. CBO’s evaluation additionally accounted for the truth that several types of debtors would possibly select income-driven and fixed-payment plans. In explicit, the debtors who select income-driven plans may be extra prone to profit extra from explicit options of these plans, comparable to loan forgiveness.

CBO projected the traits of such debtors and, in flip, their family revenue over the course of compensation. Most income-driven plans outline family revenue because the borrower’s revenue, plus his or her partner’s revenue if the borrower is married and recordsdata taxes collectively. In the Revised Pay as You Earn (REPAYE) plan, spouses’ revenue is included even for married debtors who file taxes individually.1

The mannequin used for the evaluation shares options and strategies with different fashions CBO has developed to make long-term projections of the federal funds and the economic system.2 It initiatives earnings and funds of particular person debtors and households, calculates money flows on the idea of these earnings, after which sums the money flows for the set of debtors in income-driven plans. The strategies differ from these used within the different fashions (that are usually used to make long-term projections for the entire inhabitants) as a result of folks repaying student loans in income-driven plans differ, on common, from members of the general inhabitants.

This appendix focuses on the 2 major parts of CBO’s mannequin: the underlying knowledge and the four-step technique CBO used to undertaking the lifetime money flows of loans disbursed between 2020 and 2029 and repaid via income-driven plans.

Data Sources

CBO’s major supply for historic info on debtors’ loan balances and compensation plans was the National Student Loan Data System (NSLDS)—the Department of Education’s central database for administering the federal student loan program. The NSLDS incorporates detailed info on student-loan debtors compiled by colleges and loan servicers, that are required to report new info inside 30 to 120 days. That info contains debtors’ intercourse, age, faculty of attendance, loan disbursements, instructional attainment, compensation plan, and fee historical past. CBO analyzed longitudinal knowledge for a random 4 % pattern from that knowledge set, so the information tracked the identical debtors over time. CBO used the debtors’ info to undertaking the demographic traits of future debtors.

To undertaking the revenue of debtors in income-driven compensation plans, CBO used numerous statistical fashions. The company supplemented the information from the NSLDS with knowledge from a number of different sources to mannequin the next variables:

  • The Current Population Survey (CPS) for relationships between debtors’ demographic traits and their earnings, household measurement, and spouses’ traits;
  • The Survey of Income and Program Participation (SIPP) for debtors’ marital standing;
  • The Survey of Consumer Finances (SCF) for the student debt of debtors’ spouses; and
  • Records from the NSLDS matched with imputed info on debtors’ tax returns for the connection between kind of compensation plan and earnings.3

How CBO Projected the Characteristics of Borrowers in Income-Driven Repayment Plans Over Time

CBO used info on previous debtors from the NSLDS to undertaking the traits of future debtors in income-driven compensation plans on the time they started repaying their loans. To mannequin the selection of an income-driven compensation plan for debtors taking out loans between 2020 and 2029, CBO used info on latest debtors’ enrollment in income-driven compensation plans and modeled the selection of a plan as a operate of debtors’ traits, together with their loan steadiness. CBO then used info from different knowledge sources to undertaking how the demographic traits of debtors in these plans would change over time.

Modeling Which Borrowers Would Choose Income-Driven Repayment Plans

CBO projected debtors’ collection of a given plan with a statistical mannequin based mostly on knowledge from the NSLDS. Those knowledge present info on debtors who lately started repaying their loans and whose selection of compensation plan will be noticed for a number of years after their commencement. The mannequin relates the selection of a plan to the next traits of debtors: intercourse, age, the entire quantity borrowed, instructional attainment, the kind of faculty attended (for instance, a two-year, four-year, or for-profit faculty), and the selectivity of that college.4 CBO estimated that, on common, 33 % of undergraduate debtors and 49 % of graduate debtors would choose an income-driven plan to repay loans issued between 2020 and 2029. Those debtors had been estimated to account for 37 % of the amount of loans disbursed to undergraduate students and 56 % of the amount of loans disbursed to graduate students.

When debtors start repaying their loans, the mannequin assigns chances to their enrollment in a fixed-payment plan or one in every of three alternate options: the income-based compensation (IBR) plan for brand new debtors earlier than July 1, 2014; the Pay as You Earn (PAYE) plan or the IBR plan for brand new debtors on or after July 1, 2014; or the REPAYE plan. (Borrowers within the up to date IBR plan had been grouped with these within the PAYE plan as a result of these plans have very related phrases.) CBO used the estimated chances to randomly assign debtors with sure traits to plans; to simplify the evaluation, CBO modeled debtors as remaining in the identical plan till their loan steadiness is repaid or forgiven.

CBO projected enrollment in income-driven plans utilizing a statistical mannequin based mostly on the habits of debtors who entered compensation between 2013 and 2015. That mannequin instructed that the majority debtors who would obtain loans over the 2020–2029 interval and enroll in an income-driven plan would select the PAYE or up to date IBR plan (see Table B-1). Over the identical interval, enrollment within the unique IBR plan would regularly fall: By 2029, solely 2 % of debtors enrolling in an income-driven plan would choose it. That decline happens as a result of, over time, fewer debtors getting into compensation will qualify for that plan (that’s, fewer could have begun borrowing earlier than July 1, 2014). CBO anticipated that no student borrower who started repaying loans sooner or later would choose the income-contingent compensation (ICR) plan, so loans repaid via that plan had been excluded from the evaluation.5

Table B-1.

Projected Distribution Among Income-Driven Repayment Plans of the Volume of Loans Issued From 2020 to 2029

Percent

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

IBR = income-based compensation; PAYE = Pay as You Earn; REPAYE = Revised Pay as You Earn.

a. Loans on this class are these repaid via the unique income-based compensation plan, which covers debtors who took out loans earlier than July 1, 2014.

b. This class combines loans repaid via the PAYE plan with these repaid via the up to date income-based compensation plan, which covers debtors who first took out loans on or after July 1, 2014, and has very related phrases.

CBO additionally projected that over the subsequent 10 years, the share of newly disbursed loans repaid via the Public Service Loan Forgiveness (PSLF) program would stay comparatively fixed, at the next stage than previous charges of take-up point out. Those estimates are extremely unsure, nonetheless, as a result of this system continues to be comparatively new: The earliest date at which debtors might obtain forgiveness via the PSLF program was October 1, 2017, and only a few collaborating debtors had acquired forgiveness as of September 30, 2019. On the idea of estimates of the eligible inhabitants and progress within the submission of employment certification types for the PSLF program, CBO expects the share of debtors receiving forgiveness via this system within the 2030s (for loans disbursed over the 2020–2029 interval) to be significantly bigger.

Using knowledge on previous debtors, CBO estimated that graduate and undergraduate debtors who had bigger loan balances can be extra prone to enroll in income-driven compensation plans, for 2 major causes. First, such debtors usually have smaller required month-to-month funds below such plans than they might below the usual fixed-payment plan. Second, conditional on being in an income-driven plan, debtors with bigger loan balances are much less prone to totally repay their loan by the tip of the compensation interval, which implies they’re extra prone to obtain loan forgiveness.

For related causes, debtors with greater anticipated earnings can be much less prone to enroll in income-driven plans. Because direct info on debtors’ postgraduation earnings or anticipated earnings was not out there, CBO relied on imputations from the NSLDS-matched knowledge on tax returns and estimated that enrollment in income-driven plans is inversely correlated with debtors’ postgraduation earnings. CBO took that estimated relationship under consideration when projecting the earnings of future debtors.6 Specifically, debtors in income-driven compensation plans had been projected to have decrease lifetime revenue, on common, than debtors in fixed-payment plans.7 Overall, that meant that the projected fee of enrollment in income-driven compensation plans was greater for debtors with massive balances and low earnings than for debtors with small balances or excessive earnings.

CBO’s modeling selections had been guided by the out there knowledge. Because there have been no knowledge instantly linking debtors’ compensation historical past to their postgraduation earnings on the time CBO carried out its evaluation, the company as a substitute used statistical imputations when modeling the connection between enrollment in income-driven compensation plans and debtors’ earnings.8

Modeling Changes in Borrowers’ Demographic Characteristics Over Time

CBO modeled modifications in demographic traits in a number of steps. First, CBO used historic knowledge from the NSLDS to undertaking the traits of future debtors on the time they started repaying their loans, preserving the statistical relationships between traits (comparable to intercourse, age, tutorial stage, and loan steadiness) noticed within the group of debtors who started repaying their loans in 2016.

Second, CBO used knowledge from a number of sources to mannequin year-to-year modifications in demographic outcomes for every borrower within the pattern over the length of loan compensation. To mannequin family measurement, CBO projected demographic modifications in marital standing and the variety of dependent youngsters for every borrower’s family over time. CBO modeled every borrower’s marriage outcomes as conditional on his or her intercourse, age, schooling, earlier marital standing, and 12 months of beginning, utilizing knowledge from the SIPP.9 The variety of dependent youngsters in a borrower’s family was modeled to match patterns within the CPS knowledge based mostly on people’ intercourse, age, and schooling.

Third, to simulate family earnings, which embrace spouses’ earnings for debtors who’re married, CBO simulated the demographic traits of debtors’ spouses utilizing knowledge from the CPS and accounted for the correlation between spouses’ instructional attainment.10

How CBO Projected Borrowers’ Household Earnings Over Time

After the traits of future debtors and their spouses had been projected, CBO used these traits to undertaking year-to-year family earnings for every borrower within the pattern. To account for variability in debtors’ labor market expertise over time, CBO individually modeled debtors’ and their spouses’ labor power participation, full-time and part-time standing, hours of labor, hourly wage charges, and spells of unemployment on a yearly foundation. Those labor market outcomes had been projected to rely on traits of debtors together with intercourse, age, 12 months of beginning, marital standing, variety of youngsters, and academic attainment.11 For years through which debtors had been married, their projected annual family earnings included their spouses’ earnings. Growth in debtors’ earnings matched the expansion in mixture earnings projected in CBO’s long-term macroeconomic forecast.

In addition, to replicate the inverse relationship between debtors’ lifetime earnings and their enrollment in income-driven compensation plans, CBO modeled the typical lifetime earnings of future debtors in income-driven plans as being decrease than the typical lifetime earnings of comparable debtors in fixed-payment plans.

To undertaking the family earnings of debtors within the PSLF program, CBO made one adjustment to the foregoing strategies. Using knowledge from the CPS on staff in private-versus public-sector jobs, CBO estimated that staff within the public and nonprofit sectors had been extra prone to have earnings in the course of the distribution than to have very excessive or very low earnings. CBO used that info, mixed with latest info on the share of debtors within the PSLF program, to probabilistically undertaking which debtors can be more than likely to take part in this system.12

How CBO Projected Borrowers’ Required Payments

Borrowers’ funds in income-driven plans are decided by the kind of plan and the debtors’ discretionary revenue. In most income-driven plans, discretionary revenue is outlined as adjusted gross revenue above 150 % of the federal poverty guideline for a borrower’s family. The federal poverty tips enhance with the variety of members in a borrower’s family and are up to date yearly to replicate modifications within the shopper value index. Borrowers’ required month-to-month funds are both 10 or 15 % of their discretionary earnings, relying on their fee plan.

How CBO Accounted for Irregular Payments

To undertaking lifetime money flows for loans repaid via income-driven plans, CBO wanted to account for circumstances through which debtors’ precise funds would differ from their required funds. The required funds alone point out what the money flows from loans can be if debtors by no means defaulted, deferred their funds, or pay as you go. By distinction, precise funds replicate outcomes comparable to default, restoration (via debt assortment), deferment, forbearance, and prepayment.

To incorporate these outcomes into the projected money flows, CBO used historic knowledge from the NSLDS to estimate statistical fashions relating these outcomes to debtors’ traits, together with their selection of compensation plan. CBO then used these estimates to undertaking outcomes for future cohorts of debtors (that’s, teams categorized on the idea of the 12 months they started repaying their loans). For instances through which debtors had been projected to default on loans, CBO used historic knowledge to estimate their chance of restoration.


Appendix C Projections for Different Types of Student Loans

Earlier on this report, the Congressional Budget Office offers projections for loans made to undergraduate and graduate debtors (see Chapter 3). The tables on this appendix present separate projections of common subsidy charges by kind of income-driven plan (see Table C-1), estimates of quantity and subsidy charges between 2020 and 2029 (see Table C-2), and estimates of forgiveness between 2020 and 2029 (see Table C-3) for the sorts of loans made to these debtors—backed Stafford and unsubsidized Stafford loans for undergraduates, and unsubsidized Stafford and PLUS loans for graduates.

Table C-1.

Average Subsidy Rates, by Type of Loan and Repayment Plan, 2020 to 2029

Percent

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

A subsidy fee displays the federal government’s price for a loan in cents per greenback disbursed. By regulation, the prices of federal student loans are measured utilizing procedures prescribed within the Federal Credit Reform Act of 1990. Subsidy prices don’t embrace the executive prices of disbursing and servicing loans.

CBO excluded one fee plan—the income-contingent compensation plan—from its estimates as a result of the share of debtors enrolled in that plan could be very small.

PAYE = Pay as You Earn; REPAYE = Revised Pay as You Earn.

a. Loans on this class are these repaid via the unique income-based compensation plan, which covers debtors who took out loans earlier than July 1, 2014.

b. This class combines loans repaid via the PAYE plan with these repaid via the up to date income-based compensation plan, which covers debtors who first took out loans on or after July 1, 2014, and has very related phrases.

Table C-2.

Volume and Subsidy Rates of Student Loans, by Type of Loan and Payment Plan

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

Loans in income-driven plans embrace loans that obtain forgiveness via the Public Service Loan Forgiveness program.

A subsidy fee displays the federal government’s price for a loan in cents per greenback disbursed. By regulation, the prices of federal student loans are measured utilizing procedures prescribed within the Federal Credit Reform Act of 1990. Subsidy prices don’t embrace the executive prices of disbursing and servicing loans.

a. Values for the amount of loans are cumulative totals; values for subsidy charges are averages.

Table C-3.

Disbursed, Forgiven, and Repaid Amounts of Student Loans in Income-Driven Plans, by Type of Loan

Source: Congressional Budget Office, utilizing knowledge from the Department of Education’s National Student Loan Data System.

Forgiven quantities embrace balances forgiven via the Public Service Loan Forgiveness program. Forgiven balances and funds are discounted to current values within the 12 months of a loan’s disbursement, utilizing rates of interest on Treasury securities. Forgiven balances and funds add as much as greater than one hundred pc as a result of they embrace accrued curiosity.

a. Values for disbursements and forgiven balances are cumulative totals; values for the proportion of disbursements forgiven or repaid are averages.

About This Document

This report was ready on the request of the Chairman of the Senate Committee on the Budget and the Chairman of the Senate Committee on Health, Education, Labor, and Pensions. In retaining with the Congressional Budget Office’s mandate to supply goal, neutral evaluation, the report makes no suggestions.

Nadia Karamcheva, Jeffrey Perry, and Constantine Yannelis (a visiting scholar at CBO from the University of Chicago Booth School of Business) wrote the report with steering from Sebastien Gay. Justin Humphrey produced the baseline funds estimates and estimates of the prices of coverage choices. David Burk, Tia Caldwell, Michael Falkenheim, Wendy Kiska, Xiaotong Niu, Delaney Smith, and Julie Topoleski additionally contributed to the evaluation. Nabeel Alsalam, William Carrington, Gloria Chen, Sheila Dacey, Molly Dahl, Joseph Kile, Leah Koestner, Jason Levine (previously of CBO), Shannon Mok, Damien Moore (previously of CBO), Sam Papenfuss, and Chad Shirley offered helpful feedback, as did Brent Trigg of the Joint Committee on Taxation.

Matthew Chingos of the Urban Institute, Jason Delisle of the American Enterprise Institute, Melissa Emrey-Arras of the Government Accountability Office, and Daniel Madzelan of the American Council on Education additionally offered useful feedback. The help of exterior reviewers implies no duty for the ultimate product, which rests solely with CBO.

Wendy Edelberg and Jeffrey Kling reviewed the report. Christine Browne was the editor, and Jorge Salazar was the graphics editor. An digital model is out there on CBO’s web site (www.cbo.gov/publication/55968).

CBO regularly seeks suggestions to make its work as helpful as doable. Please ship any feedback to [email protected].

Phillip L. Swagel

Director

February 2020