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November 30, 2016

Cost estimates for Income-Driven Repayment plans are unreliable

For the fiscal year 2017 budget, the Department of Education (ED) estimated that Income-Driven Repayment (IDR) plans will cost $74 billion. Actual costs will depend on how many borrowers participate in IDR plans and how much (or how little) those borrowers earn over time.

After reviewing how ED produces its cost estimates, the Government Accountability Office (GAO) criticized aspects of ED’s methodology and concluded that ED’s cost estimates are not reliable.  GAO found that ED’s methods may both over- and under-state actual costs, potentially by billions of dollars.

Specifically, GAO criticized ED’s assumption that borrowers’ incomes will not grow with inflation and noted that incorporating inflation into forecasts of borrower’s income reduces cost estimates by over $17 billion.

GAO additionally disapproved of ED’s assumption that no borrowers will switch into or out of IDR plans in the future.

Participation in Income-Driven Repayment plans has grown significantly in recent years. As of June 2016, 24 percent of Direct Loan borrowers in repayment were in IDR plans, up from 10 percent in June 2013. 

GAO Report Highlights
Full GAO report
Wall Street Journal's news story

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