This program is  currently the largest federal direct loan program with $912 billion in  outstanding loans as of June 2016. Repayment  periods are extended up to 30 years, thereby  lowering monthly payments. The percent of  borrowers participating in IDR plans more than doubled over the same  time period to 24 percent. Education’s Budget Estimates of IDR Plan Costs Are Growing, but Actual Costs Will Not Be Known for Many Years

		Education Estimates That Loans in IDR Plans Will Have Substantial Costs to the Government

Through our analysis of data underlying the President’s fiscal year 2017  budget, we found that Education estimates that Direct Loans in IDR plans  will cost the government about $74 billion over their repayment term. Our results show that current estimated IDR plan costs are  more than double what was originally expected for these cohorts. 3. This assumption conflicts with the  fact that borrowers can switch into or out of IDR plans at any time, and  IDR plan participation has grown in recent years. For instance, we found that the decision not to adjust  borrower income forecasts for inflation causes IDR plan budget estimates  to be $17 billion higher than they otherwise would be. Such testing can help identify  weaknesses so that they can be addressed, and help ensure that  estimates are reasonable. Further, Education conducted sensitivity analysis on only one key  assumption—borrower incomes—at the request of OMB. Developing a sound set of  assumptions is, of course, important. We also found that expected IDR plan costs have doubled from  $25 to $53 billion for loans issued from fiscal years 2009 through 2016— primarily due to the growing volume of loans expected to be repaid in IDR  plans. Given growth in IDR plan cost estimates  over time due to the rising volume of loans expected to be repaid in these  plans, it would also be useful to disclose that current estimates assume  that no borrowers will switch from other repayment plans into IDR plans in  the future. Some uncertainty is unavoidable when anticipating long- term loan costs, but we found numerous shortcomings in Education’s  estimation approach and quality control practices that call into question  the reliability of its budget estimates and affect the quality of information  Congress has to make informed budget decisions. More specifically, until Education assesses and improves the quality of  data and methods it uses to forecast borrowers’ future incomes and  accounts for inflation in its estimates, its IDR plan budget estimates may  be unreliable. In addition, until Education’s planned revisions to its  student loan model have been completed and tested to ensure  reasonableness, the agency’s IDR plan budget estimates will not  reasonably reflect participation trends in IDR plans, particularly the extent  to which borrowers in other repayment plans may switch into them. 5. Education generally agreed with our recommendations, stating that in  light of growing IDR plan participation, the agency has focused efforts on  improving IDR plan budget estimates. Appendix I: Objectives, Scope, and Methodology

This appendix discusses in detail our methodology for addressing (1) the  U.S. Department of Education’s (Education’s) current Income-Driven  (IDR) Repayment plan budget estimates and how they have changed  over time and (2) the extent to which Education’s approach to estimating  IDR plan costs and its quality control practices help ensure reliable  budget estimates. We also reviewed supplemental unpublished data from Education to  illustrate current IDR plan subsidy cost estimates for loans issued in fiscal  years 1995 through 2017 using assumptions underlying their estimates  for the President’s fiscal year 2016 and 2017 budget. Objective 2: Review of Education’s Approach to Estimating IDR Plan Costs and Sensitivity Analysis of Education’s IDR Repayment Model

		Evaluation of Education’s Estimation Approach

To understand and evaluate Education’s approach to estimating the cost  of loans in IDR plans, we first reviewed available documentation from  Education on the supplementary model Education created to estimate  repayment patterns of loans in IDR plans (referred to as the IDR plan  repayment model in this appendix). For instance, we did not receive  Treasury’s computer code or the actual tax data.
Why GAO Did This Study

As of June 2016, 24 percent of Direct Loan borrowers repaying their loans (or 5.3 million borrowers) were doing so in IDR plans, compared to 10 percent in June 2013. Education expects these plans to have costs to the government. GAO was asked to review Education's IDR plan budget estimates and estimation methodology.
This report examines: (1) current IDR plan budget estimates and how those estimates have changed over time, and (2) the extent to which Education's approach to estimating costs and quality control practices help ensure reliable estimates. GAO analyzed published and unpublished budget data covering Direct Loans made from fiscal years 1995 through 2015 and estimated to be made in 2016 and 2017; analyzed and tested Education's computer code used to estimate IDR plan costs; reviewed documentation related to Education's estimation approach; and interviewed officials at Education and other federal agencies.

What GAO Found

For the fiscal year 2017 budget, the U.S. Department of Education (Education) estimates that all federally issued Direct Loans in Income-Driven Repayment (IDR) plans will have government costs of $74 billion, higher than previous budget estimates. IDR plans are designed to help ease student debt burden by setting loan payments as a percentage of borrower income, extending repayment periods from the standard 10 years to up to 25 years, and forgiving remaining balances at the end of that period. While actual costs cannot be known until borrowers repay their loans, GAO found that current IDR plan budget estimates are more than double what was originally expected for loans made in fiscal years 2009 through 2016 (the only years for which original estimates are available). This growth is largely due to the rising volume of loans in IDR plans.
Education's approach to estimating IDR plan costs and quality control practices do not ensure reliable budget estimates. Weaknesses in this approach may cause costs to be over- or understated by billions of dollars. For instance:
Education assumes that borrowers' incomes will not grow with inflation even though federal guidelines for estimating loan costs state that estimates should account for relevant economic factors. GAO tested this assumption by incorporating inflation into income forecasts, and found that estimated costs fell by over $17 billion.
Education also assumes no borrowers will switch into or out of IDR plans in the future despite participation growth that has led budget estimates to more than double from $25 to $53 billion for loans made in recent fiscal years. Predicting plan switching would be advisable per federal guidance on estimating loan costs. Education has begun developing a revised model with this capability, but this model is not complete and it is not yet clear when or how well it will reflect IDR plan participation trends.
Insufficient quality controls contributed to issues GAO identified. For instance:
Education tested only one assumption for reasonableness, and did so at the request of others, although such testing is recommended in federal guidance on estimating loan costs. Without further model testing, Education's estimates may be based on unreasonable assumptions.
Due to growing IDR plan popularity, improving Education's estimation approach is especially important. Until that happens, IDR plan budget estimates will remain in question, and Congress's ability to make informed decisions may be affected.

What GAO Recommends

GAO is making six recommendations to Education to improve the quality of its IDR plan budget estimates. These include adjusting borrower income forecasts for inflation, completing planned model revisions and ensuring that they generate reasonable predictions of participation trends, and testing key assumptions. Education generally agreed with GAO's recommendations and noted actions it would take to address them.