If we were to ask you if you knew what the income-driven repayment plan was, what would you answer? Most borrowers know that there is an option to pay back their federal student loans based on their income, but they may not know the extent of it or they may not even understand how the forgiveness at the end works. Most of the income-driven repayment plans use 10 to 15 percent of your discretionary income to base your payments off of. With these plans, students can manage their student loans while still being able to devote funds elsewhere.
Once you reach the end of the repayment period which is about 20 to 25 years depending on the plan you choose, the remainder of your student loans will be forgiven. While this seems like a good plan, it is important to understand just what the plan means and how much money will be forgiven. Many people do not understand how this forgiveness program affects the overall economy and also how much the program will cost American taxpayers.
Below, we will discuss the side of the income-driven repayment plans that everyone has placed on the back burner until now. Let’s take a look.
Income-Driven Repayment Plans and What to Know
A federal report was released November 30, 2016, and it has everyone in shock at the projected cost of student loan forgiveness under the income-driven repayment plans. These plans require that students make their monthly payment on time for 20 to 25 years and once they reach that point, the remainder of the student loans will be forgiven. One plan only requires 10 years of payments for borrowers who work in an approved public service program. The first IDR plan was put into play in 2007, so the first round of student loan forgiveness is slated for 2017. Everyone is reacting to this forgiveness.
This report was extremely critical about the Department of Education’s approach to their estimation of how much debt will be forgiven from income-driven repayment plans. The shocking truth is that the actual cost is more than doubled compared to the original estimate.
The federal report showed that 40 percent of the current outstanding direct loans were under some type of income-driven repayment plan. This means that almost 1/4th of all borrowers use an income-driven repayment plan. This number has doubled from three years ago, and is only going to continue to rise as students learn about the program and as students continue to borrow federal student loans.
While the program has worked to encourage students who need financial help to apply for the income-driven repayment plans, the costs do not make much sense when it comes to the American taxpayer. In fact, it is said that the subsidy cost for taxpayers is $21 per every $100 that is dispersed.
It is no secret that there is a high cost to student loans and student loan forgiveness under the income-driven repayment plans. While there is a high cost, this program is said to help make a profit for the federal government and many proponents of the plan are afraid that Congress will cut these repayment plans, which would mean less profit.
In addition to this program meaning less profit, it also means that students who have a high amount of student loan debt would no longer have the relief they so desperately needed. Many of these borrowers would be left in financial ruin because of it.
Fortunately, it is unlikely that the income-driven repayment plans would be cut altogether, so you can take a deep breath. While they may not be cut completely, it would not be wise to rule out that they may be adjusted in some way.
Why You Don’t Need to Panic – Yet
We mentioned briefly that some fear that Congress will completely cut out the income-driven repayment plans and we stated that it is unlikely to happen. The reason why we say this is because Congress has never, up to this point, removed any type of benefit from borrowers who already receive it.
If any type of changes were to be introduced, they would affect new borrowers and loans that are taken out AFTER the origination date of the bill or law. Fortunately, this means that if Congress were to cut out the income-driven repayment plans, you would already be grandfathered in, if you are currently on one. Now, if you were not on an income-driven repayment plan and apply AFTER the new bill pass date, you would not receive it.
While the above scenario is unlikely to come to fruition, we do have an idea of what may happen. In fact, Congress may put a cap on the amount of forgiveness that a borrower can receive under this program and this would make sense. But again, these types of changes would likely only affect those borrowers who received a loan after the origination date of the new law.
On another note, you do not want to panic just yet because it appears that the report from the Department of Education and the report from the GAO are both flawed. The reason these reports are flawed is because the estimates given do not take into consideration other factors such as borrowers making more money at any point or making any additional payments to the loans. In addition, the GAO made its own estimations for cost of living expenses and the rise in them.
Since the plan does not use a standardized formula to figure out the costs of student loan forgiveness, we are not sure of the exact numbers.
Final Thoughts on Income-Driven Repayment Plans and Student Loan Forgiveness
Student loan forgiveness under the income-driven repayment plans is beneficial for many borrowers and those who make their payments on time and in full can benefit from this program. It is important to understand the true cost of student loans and as we saw in the above article, the subsidy for federal taxpayers is $21 per every $100 borrowed, which is a hefty amount.
If you are interested in an income-driven repayment plan, now is the time to talk to your student loan servicer to explore your options.