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3 reasons student-loan borrowers could start taking on more debt once Biden's plan to lower monthly payments goes into effect

By Ayelet Sheffey,

College graduation
  • Biden released a plan in August to reform income-driven repayment plans for student-loan borrowers.
  • A CBO report this week found the reforms would cost $230 billion over ten years.
  • It also projected the more generous plan would lead to increased borrowing given the lower cost to take on debt.

Monthly student-loan payments might soon be a lot cheaper for borrowers — but it could be a double-edged sword.

Alongside his announcement of up to $20,000 in student debt relief for federal borrowers in August, President Joe Biden also announced his plan to implement reforms to income-driven repayment plans. The plans are intended to give borrowers affordable monthly payments based on their income with the promise of loan forgiveness after at least 20 years. To date, servicer failures in tracking payments accurately have kept borrowers in repayment far longer than they anticipated.

Rather than creating an entirely new plan, Biden's proposal would amend the existing Revised Pay As You Earn (REPAYE) plan, which was created in 2016 to make payments more affordable for borrowers. The changes include ensuring borrowers pay no more than 5% of their discretionary income monthly on their undergraduate student loans — down from the current 10% — and shorten the timeframe for receiving loan forgiveness by allowing those who borrowed $12,000 or less originally to receive debt relief after ten years.

While Democratic lawmakers lauded the proposed improvements to IDR plans, Republican lawmakers criticized the proposal, along with its potential cost. That's why the House Education Committee Chair Virginia Foxx and Senate education committee ranking member Bill Cassidy asked the Congressional Budget Office (CBO) to prepare a report on the costs of Biden's IDR proposal. CBO released its report on Monday. It estimated the reforms would cost $230 billion over ten years, and if Biden's broad debt relief plan falls through, that cost would rise to $276 billion due to an expected increase in borrowing.

"The administration's Income-Driven Repayment rule is nothing more than a backdoor attempt to provide free college by executive fiat," Foxx said in a statement. "Transferring $230 billion from borrowers who willingly took out debt to taxpayers who did not is fiscally irresponsible and morally reprehensible. Make no mistake, I soundly reject this illegal abuse of power."

The CBO noted uncertainty with its estimates, as "it is difficult to anticipate the ways students and postsecondary institutions would respond to the availability of the plan." But it wrote in its report that should the IDR reforms be implemented as they were proposed, borrowing will increase by 12%, or about $10 billion, by fiscal year 2027 for three main reasons:

  1. Students who would already take out federal loans would borrow even more because the IDR reforms would make payments less expensive
  2. Some students who wouldn't take out federal loans under current law might borrow under the more generous IDR plan
  3. And the CBO expects that some schools will raise their tuition due to increased borrowing under the IDR reforms, which would lead to even more borrowing.

The CBO also noted that Biden plans to issue a new gainful employment rule in April, which would cut off federal aid for schools that offer career and certificate programs that leave students with a large of amount of student debt compared to their likely post-graduation earnings. The implementation of that rule would offset some of the increasing borrowing, the CBO said.

Insider has previously reported that Biden's IDR reforms could keep borrowers in the same repayment cycle if it isn't implemented properly. An Urban Institute analysis of the proposal found that the share of borrowers enrolled in IDR who earn a bachelor's degree that fully pay off their loans would fall from the current 59% to around 22%, and the share of those paying no more than half of what they borrowed would rise from 22% to 49%.

"Under current IDR plans, most borrowers can expect to repay some or all their debt," the analysis said. "If the Biden plan is implemented as proposed, fully repaying a student loan will be the exception rather than the rule."

Matthew Chingos, vice president of education and data policy at the think-tank Urban Institute and coauthor of the analysis, previously told Insider that he thinks the reforms will be significant and that Biden's administration has "done the most they can through administrative action to simplify and move us towards a world where there really are basically two options, the standard option and an income-based option."

But it remains to be seen how effectively the reforms will be implemented, and Chingos said he's worried that "it doubles down on a failed system that just has never worked well."

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