Income Driven Repayment Plans Under Threat Due To Rising Costs

Income Driven Repayment Plans Under Threat Due To Rising Costs
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Student loan reform in the United States is a hotly debated topic because any changes to the multi-trillion dollar market will have a significant impact on all stakeholders. Much of the argument is focused on the ballooning cost of higher education, both for students themselves and the federal government.

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The latest debate revolves around federal government funding for student education, specifically the costs to the federal government of income driven repayment plans for student loans.

Income driven repayment plans have become increasingly popular among students and families due to their favorable repayment options. Repayment obligations vary according to monthly income and loans are forgiven after around 20 years, positively contributing towards the affordability of higher education. The number of borrowers making use of these plans has grown from approximately 2.6 million in 2013 to 26.6 million for 2017 with the total cost to the Federal Government increasing from $1.4 billion in 2011 to $11.5 billion for 2015.

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Income driven repayment plans are commonplace in other nations such as Australia and the United Kingdom. However, as the cost of these programs has become increasingly burdensome on the state, policymakers have decided to scale back the growth of these programs or increase repayment obligations, limiting revenue growth prospects for university sectors.

According to a recent report from credit rating agency Moody's, debt relating to university funding in Australia has risen to around AUD 43 billion, the most substantial amount of loan related debt on the government's balance sheet. Unsurprisingly this has prompted policymakers to try to squeeze more out of borrowers including reducing the threshold of income at which repayment will start by AUD 9,000 to AUD 45,000 and reducing the number of university grants available.

In the UK, the government hasn't taken any significant actions to control rising borrowing, but it may only be a matter of time before it does. As Moody's reports:

"Students in the UK have also increasingly turned to IDR loans to fund tuition increases — to £9,250 in 2018 from £3,000 since 2013 — and the conversion of maintenance grants to loans. As a result, the national government’s loan-related debt was estimated to be around £100 billion in fiscal 2016/17, up from £40 billion in 2011, and is projected by the Office of Budget Responsibility to rise significantly."

Costs related to government programs designed to help students get access to higher education are also coming under scrutiny in the US.

On January 31, the US Department of Education’s Office of Inspector General issued a report calling for additional clarity around the costs to the federal government of income driven repayment plans for student loans, which, according to Moody's analysts could be just the beginning of a clampdown on increased spending in this sector by the Federal Government. Such a move would be bad news for the US higher education sector as it would affect affordability and could dampen student demand:

"Reduction of IDR plans would be credit negative for the US higher education sector because it would affect affordability and could dampen student demand. A potentially slower growth in enrollment, in turn, would exacerbate already lower expectations for universities’ revenue growth. Demographic shifts, sensitivity to price versus perceived value — which will subdue tuition growth — and the low 1%-2% rises in enrollment forecast are all contributing to slower growth."

Income Driven Repayment

Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert began his career as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute For Securities & Investment and the CFA Society of the UK. Rupert covers everything value investing for ValueWalk and co-runs HiddenValueStocks with Jacob Wolinsky Email -
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