Biden's Student Loan Plan Will Cost Taxpayers Billions

According to a new estimate from the University of Pennsylvania’s Wharton School, a central piece of President Joe Biden’s student-debt reform package could cost as much as $361 billion over the next decade.
‍

The proposed changes to income-driven repayment would cut monthly bills for undergraduate borrowers in half and fast-track eventual forgiveness of the loans. This would provide much-needed relief for borrowers struggling to repay their loans.
‍

Student loan experts have argued that the new income-driven repayment (IDR) scheme could prove more significant than Biden’s plan to forgive up to $20,000 in debt per person. With one-time forgiveness hamstrung by the courts, the new IDR scheme may become the main pillar of the administration’s attempt to tackle Americans’ $1.6 trillion federal student-debt load.
‍

The new IDR plan would provide relief to borrowers at a cost to the federal government. The Department of Education has estimated that the net federal budget impact of the plan would be $137.9 billion through 2032. However, the Penn Wharton Budget Model estimates that the cost of the plan could be as much as $333 billion to $361 billion, due to the assumption that more borrowers would sign up for the better benefits.
‍

According to Kent Smetters, a professor at Wharton who oversaw the analysis, the new program is much more generous. He also noted that the program has been designed to make it easier to sign up.
‍

Budget hawks and Republican legislators are likely to criticize the proposed changes, which the Congressional Budget Office says would cost at least $400 billion and Wharton estimates will cost $469 billion. Advocates of student-loan relief say it is a key tool to tackle racial and economic inequality, and experts say the IDR plan could become a key form of forgiveness if borrowers opt into a program that promises substantial relief at relatively little cost to the individual.
‍

A spokesperson for the Department of Education said that the IDR reforms are "responsible" and would help to "cut monthly payments in half for undergraduate borrowers from low and middle-income families."
‍

Biden's IDR plan would reduce payments for undergraduate borrowers to 5% of discretionary income, down from 10% currently. It would also increase the amount of income considered non-discretionary, allowing more people to qualify for zero-dollar payments. Borrowers with original balances of $12,000 or less would be eligible for forgiveness after 10 years, rather than 20 to 25 years under existing plans. And as long as borrowers make payments on time, they wouldn't accrue interest that has historically caused balances to balloon.
‍

"The so-called 'costs' of student debt relief are often just reductions in the interest that the government was expecting to charge student loan borrowers," Abby Shafroth, a staff attorney at the National Consumer Law Center, wrote in an email.
‍

According to the Department of Education, the proposed reforms would reduce the overall amount that eligible borrowers have to repay by an average of 40%. This would mean that the lowest-income borrowers would pay 83% less over the lifetime of their loan, while the highest-income borrowers would pay 5% less.More than three-quarters of borrowers with bachelor's degrees would get some kind of forgiveness, according to an analysis from the Urban Institute. Those who borrowed for an associate's degree could typically expect to pay back only $1,000 on a $12,000 loan.
‍

According to updates to the Department of Education website, there would also be a one-time adjustment of IDR accounts to address past accounting errors. This is expected to forgive the balances of tens of thousands of people, but the program has been pushed back.
‍

The Wharton estimate assumes that borrowers will try to either minimize their total payments over time or shrink their current monthly bills as much as possible, which would lead borrowers carrying around three-quarters of federally held student debt to enroll in IDR. That number could tick up thanks to Department of Education efforts to make enrollment easier, Smetters said, which studies show could significantly increase the share of borrowers who participate. Travis Hornsby, founder of studentloanplanner.com, said 75% could be a conservative estimate.
‍

But enrolling in an IDR plan requires most borrowers to proactively select the plan in a system that can be difficult to navigate. With just around 9 million of 36 million eligible borrowers currently enrolled in some type of IDR plan, the take-up rate of three-quarters of loan volume seems "unrealistically high," Shafroth said.
‍

There is also the question of whether, with such advantageous new terms, borrowers may begin to take on more debt and treat IDR as the default repayment option, Smetters said. This possibility was also identified by Hornsby and the Urban Institute. If this were to happen, it could drive costs much higher than the Wharton model suggests.
‍

Hornsby stated that increased borrowing will have some effect, but it is unclear how significant that effect will be.