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

The changes to income-driven repayment, which the Department of Education formally proposed earlier this month, would cut monthly bills for undergraduate borrowers in half and fast-track eventual forgiveness of the loans.

Student loan experts have argued the reforms could prove more significant than Biden’s plan to forgive up to $20,000 in debt per person — and 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.

Relief, though, comes at a cost: The Department of Education projected a net federal budget impact of $137.9 billion through 2032, while the Wharton estimate of $333 billion to $361 billion is more than double that number. That’s because the government’s calculations assume that IDR enrollment would remain constant at around a third of total loan volume, while the Penn Wharton Budget Model projects the new IDR plan would encapsulate as much as 75% of eligible loans as more borrowers sign up for better benefits.

“This new program is a lot more generous,” said Kent Smetters, the Wharton professor who guided the analysis. “And they’ve really thought through making it easier to sign up.”

The proposed changes are likely to draw criticism from budget hawks and Republican legislators who’ve already decried Biden’s direct loan forgiveness, which the Congressional Budget Office says would cost at least $400 billion and Wharton estimates will cost $469 billion. Advocates, meanwhile, point to student-loan relief as a key tool to tackle racial and economic inequality — and experts say the IDR plan could become a key form of forgiveness unto itself if borrowers opt into a program that promises substantial relief at relatively little cost to the individual.

A spokesman for the Department of Education said in a statement that the IDR reforms were “responsible” and would “cut monthly payments in half for undergraduate borrowers from low and middle-income families.”

Borrower Impact
Biden’s IDR plan would reduce payments for undergraduate borrowers to 5% of discretionary income, down from 10% currently, as well as 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.

“Much of the asserted ‘costs’ of student debt relief are actually just reductions in interest that the government expected to charge student loan borrowers,” Abby Shafroth, a staff attorney at the National Consumer Law Center, wrote in an email.

The reforms would reduce the overall amount that eligible borrowers have to repay by an average of 40%, according to the Department of Education, with the lowest-income borrowers paying 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 analysis from the Urban Institute. Those who borrowed for an associate’s degree, the analysis says, could typically expect to pay back only $1,000 on a $12,000 loan.

In addition to the new repayment rules, there would also be a one-time adjustment of IDR accounts to address past accounting errors that’s expected to forgive the balances of tens of thousands of people, but that program has been pushed back, according to quiet updates to the Department of Education website.

More Participation
The Wharton estimate assumes 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 requires most borrowers to proactively select the plan in a system that is notoriously difficult to navigate. With just around 9 million of 36 million eligible borrowers currently enrolled in some type of IDR plan, a 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 — a possibility also identified by Hornsby and the Urban Institute. That could drive costs much higher than the Wharton model suggests.

“There has to be some effect of increased borrowing from this,” Hornsby said. “The question is, ‘How big is that effect?’” 

This article was provided by Bloomberg News.