Options for Student Loan Savings
The federal student loan program has a $1.6 trillion outstanding portfolio of loans and is projected to issue an additional trillion dollars in loans over the next decade. Although these loans are generally supposed to be paid back with interest, the federal government loses money on them due to a combination of explicit subsidies in the program and non-repayment. Loans issued between 2015 and 2035 are estimated to cost over $400 billion on a present value basis. Much of this cost is due to Income-Driven Repayment (IDR) programs, including the generous SAVE program put in place by the previous administration but currently stayed by the courts.
Reforms to the current student loan program could significantly reduce deficits, while also putting downward pressure on tuition, discouraging excessive borrowing, and in some cases improving quality and accountability of higher education. Several comprehensive proposals have been put forward in recent years.
As part of our Budget Offsets Bank, the below table includes a menu of potential changes to the student loan program. Note that many policy proposals have significant interactive effects that could change the sum of total savings when multiple provisions are combined together. Nonetheless, an aggressive package of reforms from below could save $300 to $400 billion over a decade.
Importantly, while many of our estimates are at least partially based on Congressional Budget Office (CBO) scores, changes in, and uncertainty of, discount rates and repayment rates make our estimates especially uncertain.1
The table below is a menu of options and does not represent recommendations from the Committee for a Responsible Federal Budget, its board, or its staff.
Options for Student Loan Savings
Sources: Committee for a Responsible Federal Budget, Congressional Budget Office, Office of Management and Budget, Department of Education, Institute for Education Sciences.
* Rough estimate provided by Committee for a Responsible Federal Budget.
When it comes to student loans, the federal government is a direct lender – meaning they directly issue student loans and collect repayments. There are currently three different types of federally-administered student loans – Subsidized Loans (means-tested available only to undergraduates), Unsubsidized Loans (available to all undergraduate and graduate borrowers), and Direct PLUS loans (available to graduate students and parents borrowing for their children). Subsidized and Unsubsidized loans are capped at fixed-dollar amounts, but PLUS loans are only limited by tuition and indirect costs (including books, food, and housing). There are also numerous repayment plans available for each type of loan, including a standard fixed 10-year plan, extended repayment plans, and several IDR plans, one of which is legislative and known as Income Based Repayment (IBR), and the others created through executive action, with the latest creation known as SAVE.7
One way to reduce the cost of the student loan program would be to reverse various administrative actions undertaken by the Biden Administration. Although their attempts at blanket debt cancellation were thwarted by the courts, the courts have not yet ruled on President Biden’s modifications to Income Contingent Repayment that created the SAVE plan (there is currently a temporary injunction that prevents implementation of the plan while the court rules on its legality). We estimate that repealing this plan could save $130 billion if applied prospectively and $220 billion if repealed for all borrowers. Congress could save at least $15 billion more by reversing and modifying other Biden Administration changes, and CBO would score $30 billion of savings from restrictions on future rounds of debt cancellation based on the probabilistic chance of future administrative actions. Congress would likely save over $30 billion if they were to remove the language that has been used by previous administrations to cancel large amounts of debt.
Assuming the SAVE plan is reversed – by Congressional, Executive, or Judicial actions – there are a number of reforms that can be made to the rest of the student loan program. Limiting aggregate borrowing to $100,000 for graduate students and $150,000 for professional students (e.g. doctors and lawyers) saves $30 billion. Eliminating Grad PLUS loans would save $40 billion and ending all federal graduate loans – requiring graduate students to instead borrow in the private sector – could save $90 billion.
Subsidized Stafford Loans do not accrue interest while a borrower is enrolled in school. Ending this subsidy for all borrowers would save $15 billion, and eliminating the subsidy only for borrowers enrolled in graduate school would save less than $5 billion. Schools are currently not allowed to limit the amount a student can borrow even if the school is worried that borrowers should not be able to borrow above a certain amount for programs that likely have low earnings potential. Allowing schools to limit the amount borrowed could save less than $5 billion, but possibly more when linked to certain accountability plans.
Increasing monthly payments in IDR plans by increasing the percentage of discretionary income owed by borrowers each month to 15 percent (up from 10 percent) would save $30 billion and restricting the increase to only graduate borrowers would save $25 billion. Increasing that rate to 12.5 percent instead would save around $15 billion for all borrowers or only graduate students. Increasing the amount of adjusted gross income by lowering the poverty exemption from 150 percent of the federal poverty line to 125 percent for all borrowers would save $10 billion and $5 billion if restricted to graduate borrowers.
Eliminating time-based forgiveness in IDR for all borrowers would save $35 billion and likely improve borrowing and repayment behavior, especially at the graduate level. Almost all of those savings could be captured even if forgiveness continued to be offered for borrowers with only undergraduate loans.8 Extending graduate forgiveness from 20 to 25 years saves $15 billion, and extending forgiveness for only graduate borrowers from 20 to 30 years saves $20 billion.
Eliminating all IDR plans, which in its modern form only began in 2009, would likely save over $100 billion, and limiting IDR to only undergraduate borrowers would save $100 billion. Means-testing IDR and IDR forgiveness to people with perpetually low incomes could save somewhere between $70 to $80 billion depending on the specifics of the plan. President Trump’s first-term proposal to increase repayment to 12.5 percent while shortening forgiveness for undergraduate borrowers and lengthening it for graduate borrowers would save $30 billion. Making an Obama-era repayment plan called REPAYE the single IDR plan would save $10 billion. That plan halves unpaid accrued interest each month while extending graduate forgiveness to 25 years and is the favored starting point by some in Congress.9
Under Public Service Loan Forgiveness (PSLF), a borrower sees their entire remaining balance forgiven after 10 years of participation in IDR if they worked for federal, state, local, or tribal government or a 501(c)(3). Eliminating the program saves $30 billion. Creating a cap on the amount forgiven to $57,500 saves $15 billion and lowering the cap down to $10,000 would save $25 billion and would also likely limit overborrowing in certain types of graduate degree programs. Another option is to eliminate blanket loan forgiveness for public servants and instead redirect some of the savings toward a state block grant program that directly incentivizes needed public service jobs through wage increases or signing bonuses.
There has been increasing interest in strengthening accountability standards for the $140 billion in higher education loans, Pell Grants, and individual tax credits issued by the federal government each year. One option known as risk sharing would give colleges “skin in the game” for some unpaid loans, thus giving them an incentive to keep costs low and boost the earnings prospects of their students. One version from the College Cost Reduction Act – which penalizes schools for leaving borrowers with low incomes and an inability to repay their loans while rewarding schools for on-time graduation of low-income students who go on to earn high incomes – would save $20 billion. Another version which cuts off federal funding for schools that repeatedly fail tests based on student earnings or the borrower’s debt to income ratio could save $5 to $15 billion, or more with some designs.
Although policymakers will need to decide which changes to support, the above offsets bank gives them the tools to save $300 to $400 billion through a combination of rolling back existing regulations and limiting new ones, limiting the amount of loans disbursed, increasing repayment requirements in IDR, limiting or eliminating PSLF, and creating accountability measures for underperforming schools. Additional savings could come from other federal higher education spending and tax breaks.
Congress should not miss the opportunity to act. As lawmakers work to address our rising debt and finance new initiatives, all parts of the budget and tax code should be on the table for consideration. Our Budget Offsets Bank will continue to feature deficit reduction options on both the spending and revenue side.
1 Expected undergraduate loan volume has decreased by 25%, graduate volume by 3%, and changes in discount rates make payments in the later years of repayment up to 25% less valuable. Projected incomes in the program are likely lower due to more IDR data becoming available. Expected repayment rates are likely lower. Expected defaults are now higher and expected recovery rates from defaulted loans are lower.
2 We previously estimated a higher level of savings for repealing SAVE. We believe that due to changes in the baseline involving further debt cancelled by the Biden administration as well as changes in economic and behavioral assumptions, the score is now lower.
3 Although many scores in this table are interactive, this score is especially dependent on whether there are any other modifications to loan limits.
4 Income-Driven Repayment (IDR) refers to all federal student loan repayment plans offered by the government based on income. Income-Based Repayment (IBR) is the only statutory IDR and would be the default (and only) plan available to borrowers if courts rule that administrative IDR plans are illegal. For baseline purposes, in any path moving forward legislatively we assume there would only be one IDR plan.
5 Eligibility of borrowers earning under 200 percent of the federal poverty line would be determined annually. Forgiveness would occur after 20 years of eligible payments.
6 Existing borrowers would still qualify for PSLF.
7 If SAVE is struck down in courts, the plan would revert to the Obama administration’s relatively less generous REPAYE plan. It is possible that the courts will rule all IDR plans created through executive action illegal, in which case only legislative IBR would be available moving forward.
8 Eliminating time-based forgiveness would lead to higher total payments and likely drive significant behavioral changes among graduate students that would lead to them paying back their loans faster, which also drives savings.
9 Technically, the SAVE plan is known in law as REPAYE because it modified the Obama-era REPAYE, but if SAVE is struck down REPAYE would revert to the Obama era plan. To add to the confusion, the current legislative Senate vehicle to return REPAYE to its original version and make it the only plan available is called the SAVE for Students Act. Senator Cassidy proposed additional modifications, like low-debt forgiveness, which would decrease savings by $5-$10 billion if included.
