This comes as the main debt-relief initiative, forgiving up to $20,000 per borrower, faces legal uncertainty.
The Biden administration’s alternative approach, Plan B, prioritizes the overhaul of income-driven repayment plans (IDRs) that determine an individual’s monthly student loan payment based on their earnings.
The concept behind IDRs is to reduce monthly payments, however, they have encountered numerous challenges such as complex regulations and the occurrence of “negative amortization,” resulting in a borrower’s debt balance growing even when making monthly payments.
The estimated cost of Biden’s IDR reform initiative, as predicted by the Penn Wharton Budget Model, a team of economists and data scientists at the University of Pennsylvania, could reach up to $361 billion over a decade. This amount is significantly higher than the projected cost of $138 billion by the U.S. Department of Education for the next ten years.
The discrepancy in the estimates stems from divergent views on enrollment in the newly introduced IDR program. While the Biden administration predicts steady enrollment, the economists at Penn-Wharton anticipate a significant increase, projecting the IDR plan to grow from roughly 33% to potentially 75% of all eligible student loans.
The analysis pointed out that the Education Department’s estimate failed to take into account the possibility of borrowers switching from non-IDR plans to IDR plans because of the more attractive features of the new IDR plan.
The cost projections for the IDR reform plan are separate from the potential expense of the government canceling federal student loans, which is currently facing a Supreme Court case this year. As per the previous analysis by Penn-Wharton, the latter initiative alone could cost the government a minimum of $469 billion over the next ten years.