Biden IDR Plan Will Cost More than Advertised

Last month, the Biden Administration put forward a proposed rule to unilaterally expand the Income-Driven Repayment (IDR) program for student debt. In addition to being highly problematic on policy grounds, this proposal is likely to cost far more than the $138 billion estimated by the Administration. For example, Penn Wharton Budget Model (PWBM) recently estimated the IDR program will likely cost between $333 billion to $361 billion over ten years, before accounting for the policy’s effects on boosting tuition or increasing overall debt. One estimate has found the cost could exceed $1 trillion.

The IDR proposal has been presented as a proposed rule and is in a 30-day public comment period, set to end on February 10th. You can submit comments on the proposed plan here.

Under current law, borrowers are allowed to enter into one of several available income-driven repayment (IDR) programs in order to cap their annual loan repayments relative to their income and – if their income is not high enough – ultimately cancel some of the debt. Current IDR programs generally limit payments to 10 percent of discretionary income (defined as income above 150 percent of poverty) for 20 to 25 years.

The President’s proposal will make the following changes to the existing IDR program:

• Raise the amount of income that is excluded from calculations (“discretionary income”) from 150 percent of the federal poverty line to 225 percent – from $45,000 to $67,500 for a family of four.
• Reduce the payment cap by half, from 10 percent to 5 percent of discretionary income, for undergraduate debt.
• Prevent balances from growing by forgiving unpaid interest when payments don’t fully cover interest.
• Shorten the forgiveness period from 20 years to 10 years for those who borrowed less than $12,000 (phased up by 1 year per $1,000).

The Administration estimated their IDR plan will cost $138 billion through 2032, with roughly half the cost coming from existing debt and half from student debt that will be issued through 2032. They estimate about 46 percent of the cost results from raising the discretionary income exclusion, 37 percent from reducing the repayment cap to 5 percent for undergraduate debt, 9 percent from forgiving unpaid interest, and 7 percent from other provisions.

However, it is likely their estimate significantly understates the actual cost. For starters, it assumes $430 billion of existing student debt is first cancelled under their costly, regressive, and inflationary direct debt cancellation proposal that was struck down in court and is now being reviewed by the Supreme Court. The cost of the IDR plan would be higher if this debt is not cancelled as they hope.

The Administration also fails to incorporate most behavioral effects, which could expand the cost tremendously. Some of these effects include increased enrollment in IDR plans, increased enrollment in low-quality and low-value degree programs, increased borrowing, increased tuition inflation, and greater potential for abuse. These issues are discussed in detail in an analysis by Adam Looney of the Brookings Institution and Preston Cooper of the Foundation for Research on Equal Opportunity.

While the Administration assumes their proposal has the same 33 percent take-up as existing IDR plans, the actual take-up rate is likely to be far higher (Looney notes that roughly 70 percent of undergraduate borrowers could expect eventual forgiveness under the new rule). PWBM believes the take-up rate would be closer to 70 to 75 percent and estimates the IDR program will cost between $333 billion to $361 billion over ten years under those assumptions. With a 90 percent take-up rate, the cost would rise to $471 billion. Importantly, PWBM’s significantly increased estimate still does not account for any increased borrowing, which would be a near certainty given the massive increase in subsidy in the plan.

Other analyses have come in even higher. Travis Hornsby of Student Loan Planner estimates the plan would cost $558 billion to $875 billion before accounting for its effects on borrowing and tuition and up to $823 billion to $1.14 trillion including those costs.

Whether the cost is $140 billion as the Administration claims or $1 trillion larger as Hornsby does, the Administration should not be unilaterally spending scarce taxpayer dollars without offsets. Their new Income-Driven Repayment plan in particular is likely to increase borrowing, inflate tuition, encourage the creation of more low-quality programs, and distribute arbitrary windfall gains to doctors, lawyers, and other Americans with high earnings potential.

As PWBM and others have shown, the plan is also likely to be extremely costly – at least twice as much as the Administration claims. The Administration should abandon their unilateral effort to remake higher education financing and instead work with Congress on a thoughtful and responsible package of reforms that truly makes college affordable for those who need help most.