Income-driven repayment (IDR) plans came into prominence in 2007, and in the last decade the Obama administration has promoted them and broadened their scope, e.g. by proposing new ones like REPAYE. IDR plans reduce debtors’ monthly payments and ultimately forgive loans after a certain number of years, usually 20. For many years, federal student loans have been shielded from bankruptcy under most circumstances, so the government’s efforts to ease the repayment terms for student debtors may have prevented a large number of student-loan defaults on debts that would never be repaid.
Along with the election, which saw the Republican Party take control of the federal government, November ended with another bellwether for the future of federal student loans: a much publicized report by the Government Accounting Office (GAO) finding that the Department of Education has done a poor job of estimating the costs of IDR plans to the federal government. It found that the costs for loans on IDR plans for loans issued between 2009 and 2016 was $25 billion higher than the department’s figures ($28 billion). The GAO also discovered that perhaps $108 billion (one third) will be forgiven.
The department’s oversights leading to these miscalculations include assuming no current borrowers would switch to IDR plans, no borrowers with Grad PLUS loans would switch to them either, and enrollments in IDR plans would not grow despite the administration’s encouragement. Among half a dozen technical changes, the GAO recommended the department do a better job of forecasting borrowers’ incomes, e.g. by including inflation, and predicting borrowers’ preferences for switching into IDR plans. The department appeared to accept these criticisms dispassionately.
The Wall Street Journal, by contrast, did not. In a partisan editorial, it accused President Obama of bribing millennials for votes while lying to the country about the costs. The WSJ’s attitude indicates to debtors that changes are probably coming for student loan repayment plans. What those changes will consist of is unclear. President-elect Trump supports IDR plans, outlining one that would charge student debtors 12.5 percent of their monthly incomes (more recent IDR plans charge 10 percent) for 15 years. In most circumstances, this plan would probably cost more debtors in the short term but save them somewhat more than the more generous IDR plans.
Some federal legislators for their part also favor reforming IDR plans somewhat, for example, by regularly introducing the Earnings Contingent Education Loan Act (ExCEL Act). New York’s Lee Zeldin introduced a version in 2015. This law would reduce all federal loans to one type, coupled with a single repayment plan that enables employers to withhold borrowers’ payments the way the IRS does for payroll taxes. The act would take away the loan forgiveness options available in most IDR plans, but it would replace them with a cumulative interest rate cap.
As with many other policy issues, no one knows how the next administration will interact with Congress on reforming student loans, but with the Department of Education’s missteps in estimating their costs and growing hostility to loan forgiveness it’s more likely that something will happen in the next few years than before.
If you are encountering difficulties repaying student loans, bankruptcy can help. Many student debtors are also behind on their unsecured debts. A chapter 7 bankruptcy can free income that would otherwise go to student loans.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.