Recent Student Loan Actions Forgo $5 Billion in Repayments

The Department of Education announced last week a six-month extension of automatic forbearance to all borrowers enrolled in the "SAVE" income-driven repayment plan while it is being challenged in courts, adding that they will forgive any unpaid accrued interest during that time. We estimate that the Department of Education is forgoing roughly $500 million of repayments per month, meaning that this extension would result in $3 billion in forgone payments, bringing the total amount up to $5 billion. Importantly, much of those payments will instead be paid later, and so the net cost would be some fraction of that $5 billion. 

About 8 million borrowers are currently enrolled in SAVE, and nearly half of those borrowers would have been making payments if not for the announced forbearance. We estimate that this will result in $500 million per month in fewer repayments, most of which would be applied to interest.

Due to quirks of the way the SAVE program is implemented, interest forgiveness in forbearance has an outsized effect on nonpayment compared to standard loan programs. In SAVE, monthly payments are calculated as a small percentage of a borrower’s monthly payment and any unpaid interest is forgiven at the end of every month. For those making $0 payments, that means that all interest is forgiven. But for those making payments, only any unpaid interest after the borrower’s monthly payment would be forgiven. Many borrowers’ monthly payments are below their accrued monthly interest, so even if they made some kind of nominal payment – for example, $100 that did not cover the entire monthly interest – their balance will neither increase nor decrease. This means that the entirety of their payments would have gone toward paying interest, which leads to the outsized effect of interest forgiveness in the latest forbearance program.

This latest twist in the SAVE program pales in comparison to the $275 billion ten-year cost of the program should it be fully implemented. In the meantime, $500 million in payments are foregone each month while the program wields its way through the courts.