February 8, 2015

(Educators)The rising popularity of one of President Obama's biggest but most overlooked efforts to reduce student debt is creating a stir in the wake of a large reported credit write-down to the government.

The use of income-based repayment plans promoted by Obama soared in 2014, with the number of student borrowers in the programs doubling from 1.1 million to 2.2 million between the end of 2013 to the end of 2014. In total, the programs have $115 billion in student loan balances.

The programs created a controversy after Politico reported last week that the administration's budget proposal for the Department of Education included an estimated $22 billion write-down on its student loan portfolio, meaning that the total current value of what student borrowers owe the government was marked down by that amount.

"We are taking a broad range of steps to ensure that it isn't something that continues going forward," Office of Management and Budget Director Shaun Donovan told reporters Thursday.

In the context of Uncle Sam's total $1.1 trillion student loan portfolio, the credit loss is not major, even though it is the largest for a government credit program, according to Politico.

The loss was attributable to faster-than-expected enrollment in income-based repayment programs, which reduce repayments by capping borrowers' payments and ultimately forgiving them in some cases.

Obama expanded the programs by executive order in 2013 and 2014, creating a new, more generous option known as Pay As You Earn and then retroactively applying it to people with existing loans.

The $22 billion write-down shows that the programs are working well -- perhaps too well.

While he said that the administration was aiming to limit credit losses, Donovan noted that one of the administration's goals, in addition to expanding access to college, is to ensure that student debt "isn't a millstone around the neck of students going to college for years to come." Income-based repayment and Pay As You Earn are a major part of that push.

With income-based repayment and Pay As You Earn, depending on when students take out debt and their personal circumstances, borrowers may be able to cap their federal student loan payments at 10 percent or 15 percent of their incomes. Then, after 10, 20, or 25 years, depending on their particulars, they may be eligible to have the remaining balance of the loan forgiven.

That translates into a lot of relief for some borrowers who end up repaying less to the government. The OMB clarified Friday that the $22 billion write-down was due to higher-than-anticipated use of those programs and the Obama administration's action to make Pay As You Earn available to people who began repaying loans before 2007.

The spike in enrollment means that the administration's efforts to promote the plans have been a success. But the flip side is an unknown cost to the budget, as it's not clear how many more borrowers might use the plans.

"The administration has embarked on this tremendous campaign to increase enrollment, and it's been rather successful. What you're seeing in that budget adjustment or revision is the success of the Pay As You Earn campaign," said Progressive Policy Institute economist Diana Gehlhaus Carew. …