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Flip Side of Reducing Student Debt Is Increasing the Federal Deficit

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Oops—White House Loses $22 Billion on Student Loan Plans

White House education policies aimed at helping borrowers with $1.3 trillion in student debt are gaining traction with enrollment in income-based-repayment doubling in the last two years. While the programs may be working to ease the burden for borrowers, it’s coming at a potentially hefty price tag for taxpayers.

Hidden in a footnote of the president’s 2016 budget blueprint, the White House estimated that it expects to earn $22 billion less than projected in student loan payments this year. That multibillion-dollar tidbit was first unearthed by Politico, which noted that the sum was “larger than the annual budget for NASA, or the Interior Department and EPA combined.”

Related: The Hidden Reason For the Student Loan Crisis

The White House said the downgrade can largely be attributed to faster-than-expected enrollment in the president’s income-based payment plans like Pay As You Earn, which caps borrowers’ monthly payments at 10 percent of their income, then forgives the debt after 20 years of consistent payment. Originally, people could qualify for the program if they took out loans after October 2007 and continued borrowing through 2011, but Obama recently expanded the program to borrowers who took out loans before that.

In 2010, President Obama signed the Pay As You Earn program into law—but hardly anyone used it thanks to a less than impressive outreach campaign. In an attempt to ramp up enrollment in the program, the president used an executive order requiring the Department of Education to reach out to borrowers in danger of defaulting to tell them about all of their options—including Pay As You Earn. Participation ticked up a bit—but it was still marginal.

Last summer, he used another executive order to go a step further with the program and expanded eligibility to people who took out loans prior to October 2007. The expansion was estimated to cost about $9 billion, according to the White House budget. As expected, the effort boosted participation significantly.

In just one last year, enrollment in the income-based repayment plans doubled from 1.1 million in 2013 to 2.2 million in 2014.

There are other forms of repayment plans, which typically cap payments at 10 percent to 15 percent of borrowers’ annual incomes. Their debt is forgiven after 10 to 25 years of consistent annual payments—it all just depends on their circumstances. People in the public sector can have their debts forgiven after 10 years.

Related: How to Really Fix Our Student Debt Crisis

The good news is the repayment policies are working to help borrowers find manageable ways to pay back their loans and ease their burdens, especially at a time when the average American with outstanding student debt owes $29,000. Meanwhile, college tuition continues to rise.

According to The College Board, the average price of attending a four-year private college jumped 146 percent in the past 30 years, and the price for a four-year public school ticked up by 225 percent, the Motley Fool noted.

The bad news is that these programs are costing taxpayers a fortune and adding to the national debt. An earlier report from the Brookings Institution estimated Pay As You Earn would end up costing taxpayers $14 billion a year.

The administration’s revision of $21 billion is just a drop in the bucket compared to the $740 billion in direct student loans.

As The Atlantic’s Jonathan Weisman explains, “These dollars are being subtracted from the value of every single outstanding federal student loan at once. In other words, it’s basically a one-time charge; it’s not like we’ll be spending an additional $22 billion every year from now on.”

Still, as more people continue using the program, the costs will continue to climb.

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New report suggests ways to ease applying for and dealing with loans

In the report, the National Association of Student Financial Aid Administrators made six suggestions to the U.S. Department of Education to streamline how loans are serviced and to reduce confusion among students.

The recommendations include developing a central loan portal where students can manage all of their loans and ensuring that consumer protections apply to all students taking out loans.

There is more than $1.2 trillion of student debt in the U.S. and, according to the report, much of that debt is unnecessarily difficult to manage.

Students fill out the Free Application for Federal Student Aid, commonly known as FAFSA, and College Scholarship Service Profile forms each year, and the University then offers the student a mix of federal and private loans as well as grants and scholarships to address the student’s need.

Kristin Anthony, assistant director of federal direct loan programs at UNC, said financial aid awards are then reported to the federal government, which records the loan and assigns further managing and servicing of that loan to one of several private companies.

“Right now, it’s sort of like an umbrella system,” Anthony said.

One of the report’s suggestions concerned notifications sent to students about their loans, saying that all financial aid correspondence should come directly from the Department of Education.

Due to the number of entities involved in taking out a loan, Anthony said it is common for students to not be able to follow the status of their loan.

And some students haven’t realized that loans offered to them one year are automatically offered again in subsequent years, Anthony said.

“I have had instances where students are concerned because they don’t believe they took the loan,” she said.

Still, UNC meets students’ financial needs in ways that minimize the need for loans. Of the $183 million of financial need among University students in the 2012-2013 school year, 72 percent was met with grants and scholarships, with only 28 percent being met through loans.

The default rate on student loans at UNC is also small: 2.3 percent.

Freshman Soumaya Lansari is a Carolina Covenant scholar, and she chose UNC in part because of its financial aid. She said that all of her financial needs were met by the University, but she has had some trouble navigating the financial aid application.

“The CSS was horrible, and the FAFSA, once you have your taxes in order it’s pretty simple, but the CSS is so detailed.”

US Boosts Estimated Cost of Student Debt Forgiveness

The government is on pace to forgive billions of dollars more in student loans than previously thought as droves of borrowers enroll in federal repayment plans, raising fresh concerns about potential costs to taxpayers on more than $1 trillion in education debt.

As part of its annual budget, the Obama administration this past week raised by $22 billion the estimated cost for federal student loans, due to plans that peg monthly…

The College Loan Bombshell Hidden in the Budget

In obscure data tables buried deep in its 2016 budget proposal, the Obama administration revealed this week that its student loan program had a $21.8 billion shortfall last year, apparently the largest ever recorded for any government credit program.

The main cause of the shortfall was President Barack Obama’s recent efforts to provide relief for borrowers drowning in student debt, reforms that have already begun to reduce loan payments to the government. For more than two decades, budget analysts have recalculated the projected costs of about 120 credit programs every year, but they have never lowered their expectations of repayments this dramatically. The $21.8 billion revision—larger than the annual budget for NASA, or the Interior Department and EPA combined—will be tacked onto the federal deficit.

“Wow,” marveled Steve Ellis, vice president of Taxpayers for Common Sense. “Whether or not it’s good policy to help borrowers with their payments, it’s obviously costly for taxpayers.”

The 40 million Americans with student loans are now saddled with more than $1.2 trillion in outstanding debt. And with higher education costs rising much faster than inflation, the already massive program has been growing at a spectacular clip; direct government loans alone increased 44 percent over the last two years despite an aura of austerity in Washington. The Obama administration has tried to ease the burden for some borrowers by reducing their payments to 10 percent of their income and forgiving their loans after 20 years; this year, the Education Department plans to make all borrowers eligible for that “pay-as-you-earn” relief.

Student loan defaults increased somewhat last year, but the department says the primary drivers of the unprecedented “re-estimate”—budget-wonk jargon for the update of expected loan costs—were Obama’s policy changes, the recent ones as well as the upcoming ones. And because of a quirk in the budget process for credit programs, the department can add the $21.8 billion to the deficit automatically, without seeking appropriations or even approval from Congress.

That’s a big quasi-bailout, increasing the deficit nearly 5 percent. The White House budget office was unaware of any larger re-estimates since the current scoring rules for credit programs went into effect in 1992. As a January Politico Magazine feature on the government’s unusual credit portfolio reported, the Federal Housing Administration has stuck more than $75 billion worth of similar re-estimates onto Uncle Sam’s tab over the last two decades, most of them after the recent housing bust led to a cascade of FHA-backed mortgage defaults. But it’s never had a one-year shortfall quite as drastic as this.

It’s not yet clear whether this will be a hefty one-time revision, or a harbinger of oceans of red ink as millions more borrowers get relief on their payments to the government. Several reports by Barclays Capital have warned that Obama’s generosity to borrowers could leave the student loan program as much as $250 billion in the hole over the next decade. And behind closed doors, officials in the White House budget office and the Treasury Department have criticized the Education Department’s loan models as overly optimistic, with some officials pushing internally for third-party audits.

But administration officials said there’s no reason to think this year’s shortfall will recur. They believe that their budgets going forward will accurately reflect their new efforts to help borrowers limit their payments, that pay-as-you-earn will be “baked into the cake.” Historically, re-estimates for the better and for the worse have tended to cancel each other out across the government. In fact, this year, the government’s credit portfolio increased to $3.3 trillion, larger than any U.S. bank’s, but the re-estimates for all the programs besides student loans netted out to less than $1 billion.

The administration argues that even the $21.8 billion student loan shortfall is a relative pittance for the Education Department’s $740 billion book of direct loans, the second-largest government credit portfolio after FHA mortgage guarantees.

“Any re-estimate should be considered in this context,” says White House Office of Management and Budget spokeswoman Emily Cain.

Michael Grunwald is a senior staff writer for Politico Magazine.