Obama Budget Ups Estimate of Windfall Benefits in Income-Based Repayment

President Obama’s fiscal year 2016 budget request again proposes key changes to the Income-Based Repayment (IBR) program for federal student loans. These changes were first included in last year’s budget request and help make the program more fiscally and politically sustainable. They closely follow some of the changes we proposed in 2012 and 2013 to reduce benefits for those with high graduate school debt and ensure that a borrower cannot exclude a spouse’s income from the payment calculation.

The Obama administration has revealed this year that the costs to the federal government for these poorly targeted benefits are far larger than originally estimated. Budget documents last year put the cost of those benefits at around $600 million per year. This year’s budget revises that estimate sharply upward to $1.5 billion per year. This is similar to a story from last year where the administration upped its cost estimate for a different proposal, letting older cohorts of borrowers access the most generous IBR plan, from an original $1.7 billion cost to $7.6 billion. By the way, the administration is enacting that proposal through regulation this year, bypassing the legislative process. That’s why it’s not in this year’s budget.

Nothing in this year’s budget documents explain why the administration sees the costs of IBR’s over-generous benefits for graduate school coming in so much higher. Of course, we’ve been arguing for years that the changes to IBR that the Obama administration led the charge to enact in 2010 tipped the scales toward providing large benefits to graduate students, giving them an incentive to borrow far more than they would ever have to repay. Our latest paper detailed the perverse incentives students and schools face when unlimited graduate school loans, IBR, and the Public Service Loan Forgiveness benefit are combined.

Of course, students and the schools that charge them tuition have started to figure out just how great these benefits are. Last month, the Department reported that enrollment in IBR is growing rapidly. We also learned from a Department of Education presentation that half of outstanding Grad PLUS loans — federal student loans for graduate school that students can use to cover the entire cost of any graduate education — are enrolled in IBR. Debt from attending graduate school has also surged in recent years. The Obama administration’s number crunchers apparently are taking notice and adjusting the costs accordingly.

The president’s proposed IBR changes go a long way toward fixing the problem. Congress should go further, especially with respect to limiting Public Service Loan Forgiveness, before another year of surprisingly high costs are on the books.