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White House Ups Cost Estimate for Income-Based Repayment

The Obama administration has quietly revised the cost estimate for changes it made to the Income-Based Repayment (IBR) program for student loans. Those changes, made in legislation in 2010 and through regulation in 2012, resulted in the new program that the administration calls Pay As You Earn (PAYE). The large upward revision in the cost of those changes, revealed in White House budget documents last month, is surprising—especially because the higher costs come even afterfactoring in the president’s proposal to reduce the program’s benefits for some borrowers, mainly those with graduate school debt.

Under the PAYE plan’s more generous terms, borrowers’ payments are capped at 10 percent of income (after an exemption) instead of the 15 percent cap set under IBR, and loan forgiveness is provided after 20 years of payments instead of 25. ((The terms of Public Service Loan Forgiveness are the same under both repayment plans, allowing for loan forgiveness after 10 years of eligible payments.)) When PAYE was adopted, the administration and Congress initially limited eligibility to “new borrowers” as a means to reduce the cost of the program. As the program stands now, only borrowers who took out their first federal loans in October 2007 and later qualify for PAYE. Anyone who took out federal loans before then can only use the less-generous IBR terms.

President Obama has a number of times proposed making pre-2007 borrowers eligible for the new terms, and that’s where the cost revisions are most apparent. Tracking how the cost of that proposal has changed over time shows that the White House and the U.S. Department of Education believe that the cost of PAYE has grown considerably each year.

Specifically, in 2010 when the president first proposed what is now PAYE, the cost of permitting past borrowers to use PAYE’s more generous terms was approximately $1.7 billion. The administration reported the cost for the same proposal in 2013 as approximately $3.5 billion. In 2014 it quoted the cost at approximately $7.6 billionand that is after factoring in benefit reductions included in the proposal. ((The 2010 proposal to permit more borrowers to use PAYE applied to all prior and new borrowers because it was the first time the administration proposed the changes to Income-Based Repayment, but those changes had yet to be enacted. The 2013 proposal applied to pre-2007 borrowers because the Obama administration had enacted a change that would make new borrowers as of 2007 eligible for the more-generous PAYE terms. (New borrowers were defined as those as of late 2007, and who also took out at least one loan in 2011 or later.) The 2014 proposal applies to the same group of borrowers the 2013 proposal. Therefore, the three successive proposals to include new borrowers cover roughly the same populations of borrowers. If anything, the 2013 and 2014 proposals cover a slightly smaller population than the 2010 proposal because new borrowers as of late 2007 had already been made eligible for the more generous PAYE terms through regulatory action by the Obama administration.)) A more apples-to-apples comparison—one without the benefit reductions—is probably closer to $10 billion. So what started out as a $1.7 billion proposal is now more than five times that cost at approximately $10 billion.

pay as you earn

Remember, those figures reflect the cost of pulling past borrowers into the fold, so the population of borrowers to whom the change would apply is not growing across all three estimates. If anything, it’s shrinking. ((See footnote 2 above.)) Maybe uptake estimates are higher for this population, and that is driving the increased expected costs. Maybe costs per borrower are higher (even after the proposed benefit reductions). Or maybe it’s both. The administration doesn’t say.

We can glean a sense of what is behind those changes, however, by using other figures in the president’s budget. The best available information is probably the administration’s projections for uptake in income-based repayment programs and in the costs for future cohorts of borrowers (a measure that includes the old version of IBR, as well as PAYE and Income-Contingent Repayment, although the vast majority of loans in future cohorts will be eligible for PAYE). ((As is usually the case, these statistics are far from perfect for this analysis. First, the budget documents historically have not shown IBR enrollment for PLUS loans, erroneously explaining that those loans are ineligible for the repayment plan (Parent PLUS loans are not eligible, except for Income-Contingent Repayment in limited cases, but Grad PLUS loans are eligible for IBR and PAYE). However, the fiscal year 2015 budget now includes projected IBR statistics for PLUS loans (albeit without a breakdown of Parent vs Grad PLUS). New America’s analysis excludes all PLUS loans for an apples-to-apples comparison. Second, the budget documents lump any of the three income-based repayment plans into one category. Generally, however, future cohorts of loans, to which this analysis refers, are eligible for PAYE. For the 2010 estimate of the 2011 cohort, 100% of loans were presumed eligible for PAYE.)) The assumption is that, if the administration has upped its estimates for future cohorts of borrowers, it’s probably done the same for past cohorts.

In fact, comparing estimates for the same or similar years across the president’s budgets shows a massive increase in enrollment projections for IBR and PAYE. The figures are up over 50 percent from last year—for the same year. For example, the administration estimated (p. 352) last year that about $17 billion in loans issued in 2013 will be repaid through IBR, or about 12 percent of the cohort. But now the administration says the figure (p. 365) for that year is $27 billion—and meanwhile, the total number of loans repaid through any plan has been revisedlower from the earlier estimate. ((These figures both exclude PLUS loans so that they are comparable. The fiscal year 2014 budget documents do not include a projection of PLUS loans repaid through income-based repayment plans. The fiscal year 2015 budget does. To make the number comparable, PLUS loans are excluded from both tallies.)) So roughly 19 percent of the cohort will use IBR and PAYE.

In 2010, the year the president proposed PAYE, the administration estimated (p. 393) that of the 2011 cohort, only $6.6 billion in loans would be repaid through IBR and PAYE, or about 5 percent of the cohort. That means today’s enrollment projections are about 300 percent higher than the original estimates. (The Department of Education has also begun reporting enrollment figures on a quarterly basis, and these figures are also growing rapidly, which is shown in this analysis.)

It’s difficult to tell from the budget documents whether the costs per loan have also changed over time. There isn’t a clear trend, with cost estimates rising and falling depending on the cohort of loans and the year in which the administration released the estimate. Since 2010, cost estimates for IBR and PAYE on a per-loan basis reported in the president’s budget have ranged from a high of 40 percent ($40 cost for every $100 lent) to as low as 10 percent. But with no strong trend in any one direction from year to year, it’s hard to know what to make of those numbers.

Nevertheless, the cost estimate for loans repaid under IBR are all relatively high for federal student loans overall, and IBR and PAYE have remained the costliest repayment plan for the government of all the plans the federal loan program provides. (The Brookings Institution has a new study out on this topic.) Greater IBR enrollment will therefore always increase the cost of the overall program. And that is most likelythe driving force behind the Obama administration’s successive revisions of what it costs to allow pre-2007 borrowers into the PAYE program.