published Nov 30th 2016, 4:23 pm, by Shahien Nasiripour
(Bloomberg) —
The Obama administration, presenting itself as an ally to student debtors, has worked to make the federal student loan program more generous to them and argues that its efforts will mean more than $108 billion in student debt will eventually be forgiven.

But faulty assumptions underlying that figure suggest there’s little reason to trust it.

That’s the takeaway from a new report by the Government Accountability Office that details the myriad ways the U.S. Department of Education has failed to produce credible estimates of how much borrowers could benefit from plans that cap their monthly payments at levels as low as 10 percent of their earnings. Taxpayers who will shoulder the cost of forgiving such debt—and policymakers who craft federal spending plans based on those estimates—also are in the dark.

The Education Department’s “numerous shortcomings,” auditors said in their report, “call into question the reliability of its budget estimates and affect the quality of information Congress has to make informed budget decisions.”

Alexander Holt, a policy analyst at Washington think tank New America, was blunt in his assessment of agency officials: “They’re either being extremely deceitful or extremely incompetent.”

The department said it will improve its modeling in response to the report.

Income-based repayment plans let borrowers make monthly payments ranging from 10 percent to 20 percent of their discretionary income, hundreds of dollars less than what they’d otherwise pay. The remaining balance is usually forgiven after 20 or 25 years .

The average borrower with government-owned student loans who’s enrolled in an income plan owes nearly $51,000, makes about $34,000 a year, and pays about $154 a month on her debt, federal data show. Budget watchdogs say taxpayers stand to lose, because every dollar not collected is a dollar lost by the federal government.

Enrollment in such plans for loans made directly by the government has skyrocketed over the past few years—to about 5.3 million borrowers, who collectively owe $269 billion . That surge has led the Education Department to estimate that taxpayers will lose about $73 billion as a result of forgone monthly payments on all loans made through this fiscal year. Not to worry: The program’s overall profit is still about $84 billion.

But the GAO said the department could be underestimating the potential cost of generous repayment plans by failing to consider the possibility that more borrowers will switch out of standard repayment plans into income-based ones.

There are many reasons why the agency’s projections could be way off.

For one thing, debtors in income-based plans must re-certify their earnings information each year so the government can determine how much they must pay. But according to the GAO report, the Education Department “unrealistically assumes that no borrower will fail to re-certify their income.”

More than half of borrowers fail to meet their annual deadline, whether because of incompetent loan servicers or because of borrowers’ own laziness, data show. As a result, their required monthly payment often jumps by hundreds of dollars, reverting to what the government expects under a standard 10-year repayment plan, so that borrowers pay every penny they owe under the standard repayment plan. Over the past year, more borrowers fell out of the two most popular income plans than enrolled.

The Education Department also assumes that every single borrower eligible to have his unpaid debt forgiven after 10 years of working in public service will in fact have his loans forgiven—a population the agency thinks makes up about 25 percent of all debtors. But only a fraction of eligible borrowers are actually enrolled. The GAO estimates that if 10 percent fewer public-service workers participated in the income plans, the estimated $73 billion cost would fall to about $64 billion.

The department doesn’t even account for inflation when estimating borrowers’ future incomes. In other words, it assumes that what borrowers make 20 years from now will be similar to what they make today. Simply including inflation would reduce the estimated $73 billion cost by about $17 billion, auditors said in their report.

Donald Trump has called the Education Department a “disaster” and threatened to abolish it. Wednesday’s report could make it easier for him.

To contact the author of this story: Shahien Nasiripour in New York at snasiripour1@bloomberg.net To contact the editor responsible for this story: Josh Petri at jpetri4@bloomberg.net Samantha Schulz
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