Here’s How Much Student Debt the Government is Going to Forgive

November 30, 2016
by Lisa Rowan
Writer and Producer

The government just figured out how many billions worth of student loans it’s going to have to forgive as part of income-based repayment plan agreements, and it’s not exactly pleased.

The Government Accountability Office released a report on Wednesday that explains it will have to forgive at least $108 billion worth of student debt when borrowers who started paying back their loans between 1995 and 2017 reach the end of their income-driven repayment plans.

While Congress approved these programs over the past two decades, President Obama has encouraged new graduates to enroll. The report was commissioned last year after a sharp uptick in borrower enrollment, which The Wall Street Journal notes has tripled in the last three years.

What is Income-Based Student Loan Repayment?

Income-based repayment plans, which are only available for federal loans, typically offer lower loan payments over a longer period of time. As your income increases over the years, you pay more toward your loan balance.

You must apply to participate in this program and recertify your income and family size each year so your loan servicer can recalculate your payments.

When your repayment period ends — usually after 20 years — the government forgives your remaining balance.

How Much Could Income-Driven Repayment Help You Save?

The Federal Student Aid office of the Department of Education provides a few examples of what you might pay — and save — under these plans:

Say you have $30,000 of undergraduate loan debt when you graduate, and your starting salary is $25,000. If you apply for income-based repayment, your starting payments would be about $60 per month, eventually rising to $296 per month over the course of 20 years.

At the end of that term, the government forgives the balance, which would be somewhere between $24,000 and $27,000.

Why does the government get left with so much? It’s because those loans, spread over a longer repayment period, still accrue interest.

The report made recommendations to adjust the program’s expectations, but says it may not know the full costs of the program for 40 years.

Your Turn: Did you enroll in an income-based loan repayment program? How much do you expect the government to forgive after 20 years?

Lisa Rowan is a writer and producer at The Penny Hoarder.

by Lisa Rowan
Contributor for The Penny Hoarder

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