Price of Biden's student loan repayment plan could double as take-up increases, report says

The Biden administration's new student loan repayment program is poised to substantially reduce loan payments for many Americans. Still, it could cost the federal government more than double what the administration anticipated, according to one report.

The Department of Education's proposed rule would modify the terms of one of the income-driven repayment plans known as the Revised Pay As You Earn (REPAYE). Any individual borrower who makes less than roughly $30,600 annually and any borrower in a family of four who makes less than about $62,400 would be eligible for $0 monthly payments.

Graduates of a four-year public university stand to save an additional $2,000 annually through lower monthly payments under the proposed regulations compared to the current REPAYE plan, according to the department.

Penn Wharton Budget Model (PWBM), a nonpartisan group at the University of Pennsylvania's Wharton School, projected that the price tag for the plan could ultimately total between $333 billion to $361 billion over the 10-year budget window, based on the number of student loan borrowers who are predicted to take up the plan. PWBM's estimate is more than twice as much as the cost projected by the Biden administration, which based its calculation on a lower take-up rate.

"Even though the monthly payment will decrease, the total payments will not change as much," higher education expert Mark Kantrowitz said. "A lower monthly payment means that borrowers will remain in repayment for longer, except for borrowers who start off with $12,000 or less in debt and qualify for forgiveness after ten years (adding a year for each additional $1,000 in debt).

"So, borrowers who would have paid off their debt in full before reaching the 20 or 25-year forgiveness mark will now take longer to pay off their debt, leading to more student loan payments," Kantrowitz continued.

If you have private student loans and don't qualify for federal debt relief, you could consider refinancing to lower your student loan payments. Visit Credible to compare multiple student loan lenders at once and choose the one with the best interest rate for you.

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Repayment plan take-up rate could reach north of 70%

PWBM's cost estimate is well above the $138 billion price tag the Department of Education has budgeted because it was based on the assumption that borrowers enrolling in the plan will increase from 33% to between 70% to 75% of eligible loan volumes. At a 90% take-up rate, the program is estimated to cost upwards of $450 billion. 

By contrast, the Education Department based its 10-year cost estimate on "strict ‘static’ assumptions where student take-up rates are the same for existing programs and student borrowing behavior remains unchanged," PWBM said in its report. Under those conditions, PWBM estimated a similar cost of the program, around $141 billion. 

One feature of the plan, which is likely to resonate with many, stipulates that borrowers who make their payments on time will not have any remaining accrued interest that isn't covered by their monthly payment added to their balance, PWBM said. 

"The new proposed federal repayment plan will allow borrowers to make payments that work with their budget, and as long as they stick to their repayment plan, they can prevent unpaid interest from snowballing and creating a mountain of debt," Shyam Pradheep, general manager at financial literacy platform Zogo, said. "This gets to the root of the problem that millions of borrowers are currently facing and ensures that students who are making on-time payments are working their way out of debt — not burying themselves further in it."

Although private student loan borrowers do not qualify for Biden's debt forgiveness plan, you could consider refinancing your loan to potentially reduce your monthly payment. To see if this is the right option for you, contact Credible to speak to a student loan expert and get your questions answered.

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Repayment plan costs come in addition to loan forgiveness plan estimate

PWBM's cost estimate for the repayment plan is on top of the $469 billion price tag the group previously calculated for outright student loan forgiveness. 

The Biden administration's student loan forgiveness plan would cancel up to $10,000 in federal loans per borrower and up to $20,000 for those who used Pell Grants in college, eliminating about $430 billion in outstanding student loans debt, Reuters reported. 

More than 16 million student loan borrowers have been approved for student loan forgiveness in the weeks that the application was available, according to a White House statement. However, several lawsuits against the Biden administration halted the forgiveness plan and has left millions of borrowers in limbo over whether their loans will finally be forgiven.

Costs for the proposed repayment plan could also ring up higher once things like an increase in student loan borrowing and rising tuition rates are factored in, PWBM said.  The administration is seeking feedback on the plan with a 30-day public comment period and the changes are expected to be finalized later this year.

"Should the plan hold up against pending litigation, it would create more certainty for borrowers," Chris Motola, Merchant Maverick's economic and loans analyst, said. "Students would weigh their likely income against income-contingent plans; essentially, going to school becomes a percentage tax on income."

The department's new repayment plan won't apply to private student loans. If you hold private student loans, you could consider consolidating these to a better interest rate to lower your monthly payments. Visit Credible to compare options from different lenders without affecting your credit score.  

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