Income-Driven 

Repayment Plans 

for Student Loans: 

Budgetary Costs and 

Policy Options

FEBRUARY 2020

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

© Ekaphon maneechot/Shutterstock.com
At a Glance

Introduced as a way to make student loan repayment more manageable, 

income-driven plans limit payments to a percentage of borrowers’ income 

and allow for loan forgiveness after 20 or 25 years. The Congressional Budget 

Office examined how income-driven plans differ from plans that require fixed 

monthly payments, how enrollment in income-driven plans has changed over 

time, and how those plans are projected to affect the federal budget.

• Growth in Loans Repaid Through Income-Driven Plans. The volume 

of loans in income-driven plans grew rapidly over the past decade as 

they became available to more borrowers and their terms became more 

favorable. CBO estimates that nearly half the volume of direct student 

loans in repayment was being repaid through income-driven plans at the 

end of 2017. Many borrowers—especially those with low income and large 

balances—make payments that are too small to cover the interest on their 

loans, which causes their balances to increase over time.

• Budgetary Costs of Income-Driven Plans. CBO projects that of the loans 

disbursed between 2020 and 2029, those repaid through income-driven 

plans will have greater lifetime costs to the government than those repaid 

through fixed-payment plans. Estimated under the accounting rules of 

the Federal Credit Reform Act of 1990, the cost for loans repaid through 

income-driven plans is equal to 16.9 percent of the disbursed amount; 

for other loans, the cost is −12.8 percent of the disbursed amount. In 

other words, for every dollar disbursed, the government is projected to 

lose 16.9 cents for loans repaid through income-driven plans but gain 

12.8 cents for other loans. 

• Options for Changing Income-Driven Repayment. CBO assessed the costs 

of policy options that would change the availability of income-driven plans 

or change how borrowers’ required payments are calculated. CBO estimates 

that changes to income-driven plans for graduate students would have a 

much larger effect on the budget than changes for undergraduate students. 

That is because graduate students are more likely to participate in such 

plans and tend to have larger—sometimes much larger—loan balances.

www.cbo.gov/publication/55968
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Contents

Summary 1

How Do Income-Driven Repayment Plans Differ From Other Repayment Plans? 1

How Has Enrollment in Income-Driven Repayment Plans Changed Over Time? 1

What Are the Budgetary Costs of Income-Driven Repayment Plans? 2

What Are Some Options for Changing Income-Driven Repayment Plans? 3

Chapter 1: An Introduction to Income-Driven Repayment Plans 5

An Overview of Federal Student Loans 5

Income-Driven Repayment Plans 6

BOX 1-1. INCOME-DRIVEN REPAYMENT PLANS IN OTHER COUNTRIES 7

Chapter 2: Borrowers and Loans in Income-Driven Repayment Plans 13

Growth in the Share of Borrowers and the Share of Loans 13

Changes in the Distribution of Loans Among Income-Driven Repayment Plans 13

Differences Between Borrowers in Income-Driven and Fixed-Payment Plans 14

Chapter 3: The Budgetary Costs of Income-Driven Repayment Plans 19

How the Cost of Student Loans Is Calculated 19

BOX 3-1. FAIR-VALUE ESTIMATES OF THE COST OF STUDENT LOANS 20

Projected Subsidy Rates for Loans Repaid Through Income-Driven Plans 21

Forgiveness of Loans in Income-Driven Plans 21

Chapter 4: Policy Options 27

Options That Would Change the Availability of Income-Driven Repayment Plans 28

Options That Would Change How Borrowers’ Payments Are Calculated 31

Appendix A: Present-Value Calculations 35

Appendix B: CBO’s Approach to Estimating the Cash Flows of Loans in IncomeDriven Repayment Plans 37

Data Sources 37

How CBO Projected the Characteristics of Borrowers in Income-Driven 

Repayment Plans Over Time 38

How CBO Projected Borrowers’ Household Earnings Over Time 40

How CBO Projected Borrowers’ Required Payments 40

How CBO Accounted for Irregular Payments 40

Appendix C: Projections for Different Types of Student Loans 43

List of Tables and Figures 47

About This Document 48

A

B

C
Notes

Unless this report indicates otherwise, all years referred to are federal fiscal years, which 

run from October 1 to September 30 and are designated by the calendar year in which 

they end.

Numbers in the text, tables, and figures may not add up to totals because of rounding.

PLUS loans to parents are generally not eligible for repayment through income-driven 

plans and have been excluded from CBO’s analysis in this report.

Student loan borrowers who took out student loans only for undergraduate studies are 

defined as undergraduate borrowers. Those defined as graduate borrowers took out at least 

one loan for graduate studies and may also have borrowed at the undergraduate level.

The estimates in this report are based on CBO’s August 2019 baseline budget projections, 

which incorporate the assumption that current laws would generally remain unchanged.

In this report, the subsidy cost for a fiscal year is measured by multiplying the volume 

of loans disbursed in that year by their average subsidy rate (their projected cost as a 

percentage of dollars disbursed). In its baseline projections and cost estimates, CBO would 

adjust that total to account for the timing effects of multiple disbursements of some loans 

in two fiscal years.
Summary

The volume of outstanding student loans has grown 

considerably over the past decade as the number of 

borrowers and the amounts they borrow have increased. 

In the 2018–2019 academic year, the government 

issued $76 billion in new loans to 7.6 million students. 

Overall, as of December 2018, outstanding student loans 

issued or guaranteed by the federal government totaled 

$1.4 trillion—or 6.8 percent of gross domestic product 

(GDP). 

Between 1965 and 2010, most federal student loans were 

issued by private lending institutions and guaranteed by 

the government, and most student loan borrowers made 

fixed monthly payments over a set period—typically 

10 years. Since 2010, however, all federal student loans 

have been issued directly by the federal government, 

and borrowers have begun repaying a large and growing 

fraction of those loans through income-driven repayment 

plans. Required repayments in such plans depend not 

only on a loan’s balance and interest rate but also on the 

borrower’s income. 

On average, borrowers in income-driven plans make 

smaller monthly payments than other borrowers, and the 

plans provide loan forgiveness if borrowers have not paid 

off their balance after making payments for a certain 

number of years. For those reasons, loans repaid through 

income-driven plans are more costly to the government 

than loans repaid through fixed-payment plans. 

How Do Income-Driven Repayment Plans 

Differ From Other Repayment Plans?

Introduced as a way to make student loan repayment 

more manageable, income-driven plans reduce the 

required monthly payments for borrowers with low 

income or large balances. Under the most popular 

income-driven plans, borrowers’ payments are 10 or 

15 percent of their discretionary income, which is typically defined as income above 150 percent of the federal 

poverty guideline. Furthermore, most plans cap monthly 

payments at the amount a borrower would have paid 

under a 10-year fixed-payment plan. 

The earnings and loan balances of borrowers in incomedriven plans determine whether they will repay their 

loans in full. Borrowers who have not paid off their 

loans by the end of the repayment period—typically 

20 or 25 years—have the outstanding balance forgiven. 

(Qualifying borrowers may receive forgiveness in as little 

as 10 years under the Public Service Loan Forgiveness, or 

PSLF, program.) CBO estimates that most borrowers in 

income-driven plans initially make payments that are too 

small to cover accruing interest—and therefore, over the 

first several years of repayment, their loan balances grow 

rather than shrink. If those borrowers eventually earn 

enough to make larger payments and fully repay their 

loans, they generally pay more than they would have in a 

fixed-payment plan.

CBO also found that borrowers default on their loans 

at much lower rates in income-driven plans than in 

other plans. Default rates are probably lower for loans in 

income-driven plans because payments are reduced for 

borrowers who have lower income and are less able to 

pay. But borrowers who opt in to the plans might be less 

likely to default for other reasons—for example, because 

they are more aware of their financial options. 

How Has Enrollment in Income-Driven 

Repayment Plans Changed Over Time?

The number of borrowers in income-driven plans grew 

rapidly between 2010 and 2017 as the plans became 

available to more borrowers and their terms became 

more favorable. Among borrowers who had taken out 

direct loans for undergraduate study, the share enrolled 

in income-driven plans grew from 11 to 24 percent. 

Among those who had taken out direct loans for graduate study (and for undergraduate study as well, in many 

cases), the share grew from 6 to 39 percent. 

The volume of loans in income-driven plans has grown 

even faster than the number of borrowers because borrowers with larger loan balances are more likely to select 

such plans. In particular, graduate borrowers have much 

larger loan balances, on average, and are more likely 

to enroll in income-driven plans than undergraduate 
2 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

borrowers. CBO estimates that about 45 percent of the 

volume of direct loans was being repaid through incomedriven plans in 2017, up from about 12 percent in 2010. 

What Are the Budgetary Costs of 

Income-Driven Repayment Plans?

By law, CBO follows the procedures specified in the 

Federal Credit Reform Act of 1990 (FCRA) to estimate 

the costs of the student loan program. Under FCRA, a 

loan’s lifetime cost to the government is described as a 

subsidy and is recorded in the budget in the year the loan 

is disbursed. The subsidy is measured by discounting all 

future cash flows associated with the loan—including the 

amount disbursed, the principal and interest paid, and 

debt collected from borrowers in default—to a present 

value, or current dollar amount. (The administrative 

costs of disbursing and servicing loans are not included.) 

On that FCRA basis, CBO estimated in its 

August 2019 baseline budget projections that if current laws remained unchanged, $1.05 trillion in federal 

student loans would be disbursed to students between 

2020 and 2029, increasing the deficit by $10.7 billion. 

(Those estimates exclude PLUS loans to the parents of 

students, which are not eligible for repayment through 

most income-driven plans.) Loans repaid through 

income-driven plans were projected to result in larger 

subsidies than loans repaid through fixed-payment 

plans. Specifically, CBO estimated that $490.4 billion 

in disbursed student loans would be repaid through 

income-driven plans, with a subsidy of $82.9 billion, 

and $562.7 billion in loans would be repaid through 

fixed-payment plans, with a negative subsidy—in other 

words, a gain—of $72.2 billion. For those loans, the government’s projected cost as a percentage of loan dollars 

disbursed, known as the subsidy rate, is 16.9 percent, on 

average, for income-driven plans and −12.8 percent, on 

average, for fixed-payment plans. 

CBO also estimates the costs of student loans using the 

fair-value method, which reflects the compensation a 

private investor would require to undertake the risk associated with those loans. In August 2019, CBO estimated 

that the fair-value subsidy of the loans disbursed to students between 2020 and 2029 would be $262.8 billion; 

loans repaid through income-driven plans would have a 

subsidy of $211.5 billion and a subsidy rate of 43.1 percent, and loans repaid through fixed-payment plans 

would have a subsidy of $51.4 billion and a subsidy rate 

of 9.1 percent. (The costs of student loans appear larger 

when estimated using the fair-value method because it 

accounts for the cost of market risk—the risk that arises 

because borrowers are more likely to default on their 

debt obligations when the economy is weak.) 

The costs of loans repaid through income-driven and 

fixed-payment plans differ not only because of the terms 

of the plans but because of the borrowers who enroll in 

them. In particular, borrowers who select income-driven 

plans tend to borrow more money. CBO also expects 

the average subsidy rate of loans in income-driven plans 

to be higher for loans to graduate students than loans 

to undergraduate students, mainly because graduate 

students take out larger loans, which are less likely to be 

paid off. 

Of the loans disbursed from 2020 to 2029 and repaid 

through income-driven plans, CBO estimates that 

undergraduate borrowers would have $40.3 billion 

forgiven and graduate borrowers would have $167.1 billion forgiven. (Those forgiven balances, which include 

unpaid interest, are discounted to their value in the year 

the loans were disbursed to make them more comparable 

to the original disbursement.) The forgiven amounts are 

equal to 21 percent of the disbursed amount for undergraduate borrowers and 56 percent of the disbursed 

amount for graduate borrowers. For comparison, the 

present value of payments on the same loans is equal to 

84 percent of the disbursed amount for undergraduate 

borrowers and 82 percent of the disbursed amount for 

graduate borrowers. (Because accrued interest is included 

in the calculations, and interest rates on student loans 

are higher than the discount rate, loan payments and 

forgiven balances add up to more than 100 percent of 

the originally disbursed amounts.) 

The repayment of student loans affects not only federal 

spending but also tax revenues. In both fixed-payment 

and income-driven repayment plans, student loan interest is deductible in the tax year in which it is paid. Those 

tax deductions reduce federal revenues. In addition, borrowers in income-driven plans whose loans are forgiven 

have the unpaid balance included in their taxable income 

for that year (unless the loans are forgiven through the 

PSLF program). The resulting tax revenues partly compensate the government for the cost of forgiven loans. 

However, income taxes that would be forgone through 

deductions for interest payments or collected on forgiven 

balances are not included in the estimated budgetary 

costs of income-driven repayment plans in this report. 
SUMMARY Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 3

What Are Some Options for Changing 

Income-Driven Repayment Plans?

CBO assessed the costs of two broad sets of options for 

changing income-driven repayment plans. One set of 

options would change the availability of such plans. The 

other would change borrowers’ payments. CBO analyzed 

how the options would affect the government’s costs 

through 2029 if they applied to all loans taken out by 

new borrowers as of July 1, 2020. In addition, CBO separately examined how the costs of loans to undergraduate 

and graduate borrowers would change under the options. 

The options were selected for this analysis either because 

they are similar to policies that lawmakers have considered in the past or because they illustrate how sensitive 

the plans’ costs are to certain policy parameters. 

Options That Would Change the Plans’ Availability

The three options in this category would change the 

availability of income-driven plans by making the 

Revised Pay as You Earn (REPAYE) plan the only 

income-driven plan, by making the REPAYE plan the 

only repayment plan, or by making fixed-payment plans 

the only repayment plans. The second and third options 

are diametric alternatives: enrolling all student borrowers 

in income-driven plans or eliminating income-driven 

repayment entirely. In CBO’s estimation, the second 

option would increase the subsidy cost of loans by 

$36 billion from 2020 to 2029; the third would decrease 

the subsidy cost by $122 billion over the same period. 

When estimating the effects of changing income-driven 

repayment plans, CBO focused on the REPAYE plan for 

two reasons. First, it is the newest income-driven plan. 

Second, the plan does not cap borrowers’ payments, 

which is also true of the income-driven plans in most 

recent Congressional proposals to modify the student 

loan program.

Options That Would Change How Borrowers’ 

Payments Are Calculated

The three options in this category would change borrowers’ payments in income-driven repayment plans 

by changing the portion of discretionary income used 

to calculate payments, the definition of discretionary 

income, or the timing of loan forgiveness. Each of those 

options was analyzed in conjunction with the first option 

from the previous set—that is, CBO considered the 

REPAYE plan to be the only income-driven plan in each 

case.

1

Chapter 1: An Introduction to 

Income-Driven Repayment Plans

Income-driven repayment plans are relatively new offerings in the student loan program, but the percentage of 

student loans being repaid through them is large and 

growing. The first income-driven plan was introduced in 

July 1994. Since then, several others have been created, 

each with slightly different features and parameters.

An Overview of Federal Student Loans

Most student loans were issued by private lending 

institutions and guaranteed, or insured, by the federal 

government until 2010. Today, the vast majority are 

directly issued by the federal government. The volume of 

outstanding federal guaranteed and direct student loan 

debt has increased by 128 percent over the past 10 years. 

As of December 2018, it totaled $1.4 trillion.

Between 1965 and 2010, the federal government guaranteed loans issued by banks and nonprofit lenders through 

the Federal Family Education Loan (FFEL) program. 

In 1994, the Congress established the William D. Ford 

Federal Direct Loan Program, which directly issued student loans with funds provided by the Treasury. The two 

programs operated in parallel, issuing loans under nearly 

identical terms, until the Health Care and Education 

Reconciliation Act eliminated new FFEL loans in 2010. 

Since then, all new federal student loans have been made 

through the direct loan program.1

There are three types of student loans: subsidized 

Stafford, unsubsidized Stafford, and PLUS. Subsidized 

Stafford loans are available to undergraduate students 

with financial need.2 Those loans do not accrue interest 

until payments are due (in other words, the government 

1. For a discussion of the motivations for providing federal student 

loans and other forms of student aid, see Congressional Budget 

Office, Federal Aid for Postsecondary Students (June 2018), 

www.cbo.gov/publication/53736.

2. Students are considered to have financial need if their cost 

to attend school exceeds their financial aid and expected 

contributions from their family.

subsidizes the interest), whereas other loans begin to 

accrue interest after they are disbursed. Unsubsidized 

Stafford loans are available to both undergraduate and 

graduate students irrespective of their financial need. 

PLUS loans are available to graduate students and the 

parents of undergraduate students. 

The various loans are subject to different limits and have 

different interest rates. Each type of loan is limited by 

the student’s expected cost of attendance; Stafford loans 

are further limited on the basis of the borrower’s academic level and dependency status. Interest rates have 

been higher for loans to graduate students than loans to 

undergraduate students since the 2013–2014 academic 

year.3 After leaving school, students with multiple loans 

can combine them into a single consolidation loan with 

an interest rate that is a blend of the original ones.4

Once borrowers begin repaying their loans, they are 

required to make payments each month. Payments on 

Stafford loans and PLUS loans to graduate students 

typically begin once borrowers have been out of school 

for six months. Borrowers may suspend their loan payments by requesting a deferment if, for example, they are 

enrolled in school, serving in the military, or experiencing economic hardship. For borrowers with subsidized 

Stafford loans, interest accrual generally pauses during 

deferment. If borrowers are not eligible for deferment, 

3. Since that academic year, interest rates have been based on the 

high yield of the 10-year Treasury note from the last auction 

before June 1 of the previous academic year. Undergraduate 

Stafford loan interest rates are 2.05 percentage points higher than 

that rate, graduate Stafford loan interest rates are 3.6 percentage 

points higher, and PLUS loan interest rates are 4.6 percentage 

points higher.

4. For more information about the terms of the student loan 

program, see David P. Smole, Federal Student Loans Made 

Through the William D. Ford Federal Direct Loan Program: 

Terms and Conditions for Borrowers, CRS Report R40122 

(Congressional Research Service, September 24, 2019), 

https://go.usa.gov/xd5BZ. 
6 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

they may request forbearance, which also allows them to 

postpone or reduce their monthly payments, although 

interest still accrues. 

A loan is considered to be delinquent if the borrower 

does not make a payment by the due date and to be 

in default when payments are at least 270 days late. 

Borrowers with delinquent loans have their information reported to credit agencies, and those with loans in 

default can have their wages and tax refunds garnished. 

Despite those potential consequences, student loans have 

the highest delinquency rate of all types of consumer 

debt, according the Federal Reserve Bank of New York.5

For example, in the first quarter of 2019, the 90-day 

delinquency rate was 10.9 percent for federal and private 

student loans and only 4.7 percent for auto loans.

Income-Driven Repayment Plans

Income-driven repayment plans were introduced by the 

Congress to provide financial relief for borrowers who 

might otherwise be at risk of default. (The plans have 

similarities with those in other countries; see Box 1-1.) 

Throughout the history of the student loan program, 

most borrowers have enrolled in 10-year fixed-payment 

plans, which require fixed monthly payments under a 

schedule similar to that of a 10-year mortgage. Unless 

they select another option, borrowers are enrolled automatically in the 10-year fixed-payment plan.6

By contrast, income-driven plans tie payments to 

borrowers’ household income, requiring payments of a 

fraction—usually 10 or 15 percent—of their discretionary income.7

 (In most income-driven plans, discretionary 

5. See Federal Reserve Bank of New York, Center for 

Microeconomic Data, Quarterly Report on Household Debt 

and Credit (November 2019), p. 12, www.newyorkfed.org/

microeconomics/hhdc.html. 

6. Borrowers in fixed-payment plans who have larger balances can 

choose a longer term of repayment, up to 30 years. Borrowers 

can also select a graduated payment plan, under which payments 

are initially small and increase over time. Borrowers with FFEL 

loans can select an income-sensitive repayment plan, under 

which payments are adjusted annually on the basis of borrowers’ 

income. Because the income-sensitive plan does not offer loan 

forgiveness, CBO did not classify it as an income-driven plan in 

this report.

7. Household income is generally defined as borrowers’ adjusted 

gross income on their most recent tax return plus, for borrowers 

who are married and file jointly, their spouse’s adjusted gross 

income. Under the Revised Pay as You Earn plan, the spouse’s 

income is included regardless of the borrower’s tax-filing status. 

A borrower’s household includes the borrower, his or her spouse, 

and any dependent children.

income is defined as income over 150 percent of the 

federal poverty guideline.) Outstanding balances are forgiven after either 20 or 25 years of qualifying payments. 

A qualifying payment is any monthly payment that is 

equal to or greater than the amount scheduled under the 

plan; for borrowers with no discretionary income, qualifying payments may be as low as zero dollars. 

Borrowers in income-driven plans may also qualify for 

forgiveness after 10 years of payments through the Public 

Service Loan Forgiveness program, which was created 

by the College Cost Reduction and Access Act of 2007. 

To qualify, borrowers must be employed full time by a 

public-service employer.8 The Congress introduced the 

program to encourage highly educated borrowers to 

enter lower-paying jobs in fields such as public-interest 

legal services, public safety, health care, and education.9

However, some researchers have suggested that the 

program’s generous loan forgiveness might incentivize students to overborrow.10 Although forgiven loan 

balances are typically included in borrowers’ taxable 

income, balances forgiven through the PSLF program are 

not taxed.11

Income-driven plans offer several advantages to borrowers. One advantage is that required payments are small 

if a borrower’s income is low. Those smaller required 

payments can help borrowers avoid default—and, in 

turn, consequences such as garnished wages and barriers 

to future borrowing. Also, most plans limit required 

payments to the amount borrowers would owe under 

a 10-year fixed-payment plan, regardless of how much 

their income rises. Finally, because borrowers’ loans are 

8. Public-service employers include government agencies at any 

level, nonprofit organizations that are tax-exempt under section 

501(c)(3) of the Internal Revenue Code, and other private 

nonprofit organizations that provide a public service. For more 

information about qualifying employers, see Department of 

Education, Office of Federal Student Aid, “Public Service Loan 

Forgiveness” (accessed January 27, 2020), https://go.usa.gov/

xppCF.

9. See U.S. House of Representatives, Committee on Education and 

Labor, College Cost Reduction Act of 2007: Report to Accompany 

H.R. 2669, House Report 110-210 (June 25, 2007), pp. 48–49, 

https://go.usa.gov/xppCh.

10. For example, see Kevin J. James and Andrew P. Kelly, Balancing 

Risk and Responsibility: Reforming Student Loan Repayment

(American Enterprise Institute, Center on Higher Education 

Reform, November 2015), https://tinyurl.com/rraxvjs.

11. For more information, see Alexandra Hegji, The Public Service 

Loan Forgiveness Program: Selected Issues, CRS Report R45389 

(Congressional Research Service, October 29, 2018), 

https://go.usa.gov/xd5B8. 
CHAPTER 1 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 7

forgiven as long as they make the required amount of 

payments, many borrowers will not have to pay off the 

full principal or all of the interest that has accrued during 

the repayment period. 

However, income-driven plans may also have disadvantages. Some borrowers may pay more interest over 

their repayment term than they would have in a fixedpayment plan, although borrowers can avoid accruing 

additional interest by paying more than their plan 

requires. Furthermore, borrowers who receive loan 

forgiveness may face a large tax liability if the forgiven 

balance is included in their taxable income.

Types of Income-Driven Repayment Plans 

Four major types of income-driven repayment plans have 

been created over the years. Policymakers have generally made newer plans more favorable to borrowers by 

decreasing borrowers’ payments, speeding up their loan 

forgiveness, or subsidizing their interest. Some plans 

were created for future borrowers; others were available 

to current borrowers as soon as they went into effect (see 

Table 1-1). 

Income-Contingent Repayment. The oldest incomedriven plan is the income-contingent repayment (ICR) 

plan, which was introduced in July 1994. 

Payments and Forgiveness. Payments in the ICR plan are 

equal to 20 percent of borrowers’ discretionary income, 

up to a cap calculated by multiplying what borrowers’ 

payments would be under a 12-year fixed-payment plan 

by an “income percentage factor” based on their income 

and marital status.12 Under the ICR plan, discretionary 

income is defined as income above the federal poverty 

12. That factor varies from 0.5052 to 2. See Annual Updates 

to the Income Contingent Repayment (ICR) Plan Formula 

for 2019—William D. Ford Federal Direct Loan Program, 

84 Fed. Reg. 23539 (May 22, 2019), https://go.usa.gov/xpsJ2. 

Box 1-1.

Income-Driven Repayment Plans in Other Countries

Australia and the United Kingdom have income-driven repayment plans for student loans that are similar to those in the 

United States.1 However, unlike borrowers in the United States, 

borrowers in those countries do not have a choice of repayment plans: All are required to enroll in income-driven plans, 

which are administered in coordination with the national tax 

authorities.2 That design keeps borrowers with low earnings or 

large balances from enrolling in income-driven plans at greater 

rates than other borrowers who would receive less benefit. 

Australia was among the first countries to adopt an incomedriven student loan repayment system, in 1989. Borrowers 

pay a percentage of their annual income above a threshold. 

For example, borrowers who began repaying their loans in 

the 2018–2019 academic year paid between 2 and 8 percent 

of income over 51,957 Australian dollars (roughly $38,864 in 

1. As a percentage of gross domestic product, the total outstanding balances 

of the U.S. and U.K. student loan programs are close in size, at 6.8 percent 

and 6.4 percent, respectively. Australia’s student loan program has an 

outstanding balance that is roughly half as large, at 3.8 percent of gross 

domestic product. 

2. In the United States, by contrast, student loan payments are collected by 

private servicers without assistance from the Internal Revenue Service.

2018 U.S. dollars). The repayment rate is based on a progressive formula, such that borrowers pay a larger portion of their 

income as their earnings increase. Payments are collected by 

the Australian Tax Office, and borrowers can elect to have their 

student loan payments withheld from their wages like income 

taxes. Unlike in the United States, unpaid balances are not 

forgiven.

The United Kingdom adopted an income-dependent repayment policy for all student loan borrowers in 1998. As in the 

Australian and U.S. systems, borrowers pay a percentage of 

their income above a threshold. Among those who began 

repaying their loans in the 2018–2019 academic year, undergraduate borrowers owed 9 percent of their income over 

£25,000 (roughly $33,250 in 2018 U.S. dollars), and graduate borrowers owed 6 percent of their income over £21,000 

(roughly $28,000 in 2018 U.S. dollars). Loan balances are 

forgiven after a period that depends on borrowers’ age 

or when their last loan was issued—once the borrower is 

65 years old, after 25 years, or, for more recent loans, after 

30 years. Forgiven balances are not treated as taxable income. 

As in Australia, payments are collected by the national tax 

authority—Her Majesty’s Revenue and Customs.
8 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

Table 1-1.

Income-Driven Repayment Plans

Repayment Plan Introduction Monthly Payment

Time Until Loan 

Forgivenessa Eligible Borrowers

Income-Contingent 

Repayment

July 1994 20 percent of discretionary income, up to a cap 

based on the borrower’s 

earnings and marital status 

and the amount he or she 

would pay under a 12-year 

fixed-payment planb

25 years Borrowers with direct subsidized or 

unsubsidized loans, direct PLUS loans 

for students, or PLUS loans made to 

parents if consolidated

Income-Based Repayment

Original plan for new 

borrowers before 

July 1, 2014

July 2009 15 percent of discretionary 

income, up to the amount 

the borrower would pay in a 

10-year fixed-payment planc

25 years Borrowers with direct or FFEL subsidized or unsubsidized loans, direct 

or FFEL PLUS loans for students, or 

direct or guaranteed consolidation 

loans that do not include PLUS loans 

made to parents

Updated plan for new 

borrowers on or after 

July 1, 2014

July 2014 10 percent of discretionary 

income, up to the amount 

the borrower would pay in a 

10-year fixed-payment planc

20 years Same as in the original plan

Pay as You Earn December 2012 10 percent of discretionary 

income, up to the amount 

the borrower would pay in a 

10-year fixed-payment planc

20 years New borrowers on or after October 

1, 2007, who received a disbursement of any of the following loans 

on or after October 1, 2011: direct 

subsidized or unsubsidized loans, 

direct PLUS loans for students, or 

direct consolidation loans that do not 

include PLUS loans made to parents

Revised Pay as You Earn December 2015 10 percent of discretionary 

incomec

20 years if all loans 

being repaid were for 

undergraduate study; 

25 years if any loans being 

repaid were for graduate or 

professional study

Borrowers with direct subsidized or 

unsubsidized loans, direct PLUS loans 

for students, or direct consolidation 

loans that do not include PLUS loans 

made to parents

Source: Congressional Budget Office, using information from the Department of Education.

FFEL = Federal Family Education Loan program.

a. Borrowers participating in the Public Service Loan Forgiveness program may have their loans forgiven in as little as 10 years.

b. Discretionary income is defined as income above the federal poverty guideline.

c. Discretionary income is defined as income above 150 percent of the federal poverty guideline.
CHAPTER 1 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 9

guideline.13 Unpaid loan balances are forgiven after 

25 years. 

Eligibility and Enrollment. Only loans made under the 

direct loan program are eligible for repayment through 

the ICR plan. That restriction limited access to the plan 

before 2010, when the majority of student loans were 

originated through the FFEL program.14 Few eligible 

borrowers choose the ICR plan today because other 

income-driven plans require smaller payments and offer 

earlier loan forgiveness. Furthermore, borrowers can 

more easily determine what their monthly payments will 

be under newer income-driven plans, which do not base 

their caps on an income percentage factor. However, for 

student borrowers with consolidation loans that include 

balances from PLUS loans to parents, the ICR plan is the 

only income-driven plan available.15

Income-Based Repayment. The income-based repayment (IBR) plan was created under the College Cost 

Reduction and Access Act of 2007 and became available 

to borrowers in July 2009. The plan was amended by the 

Health Care and Education Reconciliation Act of 2010 

for new borrowers on or after July 1, 2014. 

Payments and Forgiveness. The original version of the 

IBR plan limits payments to 15 percent of discretionary 

income, capped at the amount borrowers would have 

paid under the standard repayment plan (a 10-year 

fixed-payment plan), and offers loan forgiveness after 

25 years of repayment. The updated version limits 

payments to 10 percent of discretionary income, subject 

13. The federal poverty guidelines are updated annually by the 

Department of Health and Human Services. In 2019, the federal 

poverty guideline was $12,490 for single-person households in 

the 48 contiguous states and D.C. and increased by $4,420 with 

each additional household member. Household members include 

the borrower, his or her spouse, his or her children if they receive 

more than half of their support from the borrower, and other 

individuals who live with and receive more than half of their 

support from the borrower. See Office of the Assistant Secretary 

for Planning and Evaluation, “U.S. Federal Poverty Guidelines 

Used to Determine Financial Eligibility for Certain Federal 

Programs” (accessed November 25, 2019), https://aspe.hhs.gov/

poverty-guidelines.

14. If they met the other criteria, borrowers of guaranteed loans 

could gain access to the income-contingent plan by consolidating 

their balance into a direct consolidation loan.

15. PLUS loans to parents are eligible for repayment through the 

ICR plan only if they have been consolidated.

to the same cap, and offers loan forgiveness after just 

20 years of repayment. In each case, discretionary 

income is defined as income above 150 percent of the 

federal poverty guideline. 

Eligibility and Enrollment. Both direct and FFEL loans 

can be repaid through the IBR plan. Borrowers are 

eligible as long as they demonstrate that their payments 

would be lower than under the 10-year fixed-payment 

plan. That expanded eligibility, combined with the IBR 

plan’s greater benefits and simplicity, probably explain 

why it had a significantly higher take-up rate than the 

ICR plan in the decade after it was introduced. Both 

enrollment and the volume of loans in the plan grew rapidly over time; however, new enrollment declined after 

the introduction of the Pay as You Earn (PAYE) plan, 

which requires smaller payments and allows for faster 

loan forgiveness than the original IBR plan.

Pay as You Earn. The PAYE plan was created by the 

Department of Education and became available on 

December 21, 2012.16

Payments and Forgiveness. Required payments are limited to 10 percent of borrowers’ discretionary income, 

capped at the amount borrowers would have paid under 

the standard repayment plan. Discretionary income is 

defined as household income above 150 percent of the 

federal poverty guideline. Loan balances are forgiven 

after 20 years of repayment.

Eligibility and Enrollment. To qualify for the PAYE plan, 

students must have borrowed for the first time on or 

after October 1, 2007; must have received a disbursement of a direct loan on or after October 1, 2011; and 

must demonstrate that their payments would be lower 

under the PAYE plan than under the 10-year fixedpayment plan. Consolidation loans that include PLUS 

loans to parents are not eligible for PAYE.

16. The Department of Education created the PAYE plan using 

existing statutory authority granted by the Higher Education Act 

to amend the terms of the ICR plan. See Federal Perkins Loan 

Program, Federal Family Education Loan Program, and William 

D. Ford Federal Direct Loan Program, 77 Fed. Reg. 66087 

(November 1, 2012), https://go.usa.gov/xpprw.
10 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

Revised Pay as You Earn. The REPAYE plan was also 

created by the Department of Education and became 

available on December 17, 2015.17

Payments and Forgiveness. The REPAYE plan limits payments to 10 percent of borrowers’ discretionary income, 

defined as income above 150 percent of the federal poverty guideline. Unlike in the other income-driven plans, 

the payment amount is not capped. Loan balances are 

forgiven after 20 years for undergraduate borrowers and 

25 years for graduate borrowers. 

The REPAYE plan differs from other plans because married borrowers must pay 10 percent of their household’s 

discretionary income even if they and their spouse file 

taxes separately. In other income-driven plans, married 

borrowers who file separately pay a percentage of their 

individual discretionary income. 

All borrowers in the REPAYE plan are eligible for an 

interest subsidy, which reduces the unpaid interest added 

to their loan balance by half. That subsidy limits the 

growth of the loan balance for borrowers with very low 

earnings. 

Eligibility and Enrollment. All direct loans are eligible for 

repayment through the REPAYE plan except for PLUS 

loans to parents or consolidation loans that include such 

loans.

How Borrowers Enroll in Income-Driven 

Repayment Plans

Borrowers enroll in income-driven plans by submitting an application to their loan servicer. (Servicers are 

private companies with federal contracts to collect loan 

payments, maintain records, and communicate with 

borrowers.) The application asks borrowers to report 

whether their household has income. If it does, borrowers are asked to document their adjusted gross income 

(AGI) from their most recent tax return or to provide 

more current documentation if their income has significantly changed since their last tax filing.18 Borrowers are 

17. The REPAYE plan was created under the same statutory authority 

that was used to create the PAYE plan. See Student Assistance 

General Provisions, Federal Family Education Loan Program, 

and William D. Ford Federal Direct Loan Program, 80 Fed. Reg. 

67203 (October 30, 2015), https://go.usa.gov/xppr6.

18. Adjusted gross income comprises income from many sources, 

including wages and salaries, interest, dividends, capital gains, 

business income, and some pension and Social Security income.

also asked to report their household size, which is used 

to determine the federal poverty guideline that applies 

to their household. Once applications are submitted, the 

servicer reviews them to determine whether borrowers 

are eligible.19 Borrowers have to report their income and 

household size each year so that their required payment 

can be updated.20 Borrowers may also request to have 

their payments recalculated at any time if their household income or size changes. 

Repayment Schedules Under Income-Driven 

Repayment and Standard Fixed-Payment Plans 

The earnings and loan balances of borrowers in incomedriven plans determine their required payments over 

time—including whether they will repay their loans in 

full or have some of their balance forgiven. Those factors 

also determine whether loans repaid through such plans 

result in greater costs to the government.

Consider two borrowers who have just graduated, each 

with an income of $40,000, which grows by 3 percent annually. The first borrower has a loan balance of 

$25,000, and the second has a loan balance of $50,000. 

The first borrower’s annual payments would initially 

be lower under the PAYE plan than under the standard 

repayment plan (a 10-year fixed-payment plan; see the 

top left panel of Figure 1-1). The borrower would repay 

the loan in full under either repayment schedule, but it 

would take five years longer under the PAYE plan (see 

the top right panel of Figure 1-1). 

Under either repayment schedule, the present value of 

the cash flows from repayment would exceed the amount 

disbursed for the loan. In other words, the loan would 

generate a net gain for the government. But the present 

value of those cash flows would be larger under the PAYE 

19. A recent report analyzed the procedures in place for verifying 

borrowers’ information and identified signs of potential fraud 

or errors in information borrowers had reported about their 

income and household size. See Government Accountability 

Office, Federal Student Loans: Education Needs to Verify Borrowers’ 

Information for Income-Driven Repayment Plans, GAO-19-347 

(July 25, 2019), www.gao.gov/products/GAO-19-347. The 

FUTURE Act, Public Law 116-91 (enacted in December 2019), 

allows the Department of Education to use data from the 

Internal Revenue Service to determine borrowers’ eligibility for or 

required payments in income-driven plans.

20. Borrowers in the ICR, IBR, or PAYE plan who fail to recertify 

that information remain in the plan but must pay the maximum 

payment. Borrowers in the REPAYE plan who fail to recertify it 

are enrolled in a fixed-payment plan. 
CHAPTER 1 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 11

plan because the loan would accrue more interest over 

the repayment period.21 Specifically, the subsidy rate for 

the loan—its overall cost as a percentage of the initial 

balance—would be −15.2 percent under the PAYE plan 

and −10.2 percent under the fixed-payment plan.

21. Whether that additional interest leads to a greater net gain 

for the government depends on how the interest rate on the 

loan compares with the discount rate. In the example, the 

government’s discount rate is lower than the loan interest rate.

The second borrower’s annual repayment amounts 

would be lower under the PAYE plan than under the 

fixed-payment plan for the duration of repayment (see 

the bottom left panel of Figure 1-1). Moreover, because 

the payments in the PAYE plan would initially be less 

than the accruing interest, the loan balance would grow 

during the borrower’s first 10 years in repayment (see the 

bottom right panel of Figure 1-1). The borrower would 

not repay the loan in full and would instead receive 

forgiveness after 20 years of repayment. Overall, the loan 

would result in a net cost to the government under the 

Figure 1-1.

Repayment Schedules for Two Hypothetical Borrowers, by Type of Repayment Plan

Thousands of Dollars

0

2

4

6

8

0 2 4 6 8 10 12 14 16 18 20

0

20

40

60

0 2 4 6 8 10 12 14 16 18 20

0

2

4

6

8

0 2 4 6 8 10 12 14 16 18 20

0

20

40

60

0 2 4 6 8 10 12 14 16 18 20

10-Year FixedPayment Plan

10-Year FixedPayment Plan

Years of Repayment Years of Repayment

Years of Repayment

Annual Payments Remaining Balance

Annual Payments Remaining Balance

Years of Repayment

Borrower With a $25,000 Loan and Annual Earnings of $40,000 at the Start of Repayment

Borrower With a $50,000 Loan and Annual Earnings of $40,000 at the Start of Repayment

PAYE Plan

PAYE Plan

Source: Congressional Budget Office.

In CBO’s calculations, the borrowers’ earnings increase annually by 3 percent, and the loans have an interest rate of 6 percent. 

In the PAYE plan, monthly payments are capped at the amount borrowers would pay in a 10-year fixed-payment plan.

PAYE = Pay as You Earn.
12 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

income-driven plan but not the standard fixed-payment 

plan. Specifically, the lifetime cost to the government 

would be 19.7 percent of the originally disbursed 

amount under the income-driven plan and −10.2 percent of the originally disbursed amount under the 

fixed-payment plan. (See Appendix A for an explanation 

of how CBO calculated present values when estimating 

loan subsidies.)

Effects of Income-Driven Repayment 

Plans on Spending

Currently, student loans repaid through income-driven 

plans, as a whole, are estimated to have a larger cost than 

loans repaid through fixed-payment plans.22 Different 

aspects of repayment in income-driven plans have different effects on costs.

Income-driven plans tend to increase a loan’s outstanding 

balance by extending its repayment. Because interest is 

collected on a larger balance for a longer period of time, 

the loan accrues more interest. Later payments are discounted to reflect that they are less valuable than earlier 

payments, but because the interest rate on the loan is 

generally higher than the discount rate, the value of the 

additional interest outweighs that effect. As a result, 

income-driven plans reduce a loan’s cost to the government when most of the original balance is repaid. (The 

additional interest received by the government is partly 

offset through tax deductions; those effects are described 

below. In the budget, however, estimates of the subsidy 

costs of the student loan program exclude effects on tax 

revenues.)

Loan forgiveness, by contrast, increases the government’s 

cost for student loans repaid through income-driven 

plans. Forgiven balances represent missed cash flows 

that could have been collected if repayment terms were 

22. See Chapter 3 for details about differences in the budgetary costs 

of loans in different repayment plans. 

longer. (The cost of loan forgiveness is partly offset 

through taxes on the forgiven balances. Those effects are 

excluded from estimates of subsidy costs.)

Effects of Income-Driven Repayment 

Plans on Tax Revenues

Income-driven plans affect tax revenues in two ways. 

First, student loan borrowers can deduct the interest 

they pay on loans from their taxable income—and loans 

repaid through income-driven plans tend to accrue 

more interest, which increases borrowers’ deductions.23

Second, forgiven loan balances are included in borrowers’ taxable income (unless they are forgiven through the 

PSLF program). In the budget, tax revenues are recorded 

in the year they are collected, in contrast to the subsidy 

costs of loans, which are recorded in the year loans are 

issued.

To illustrate how those effects on taxes influence the 

cost of loans, CBO included the present value of tax 

revenue changes in its estimates of subsidy rates for the 

loans repaid by the two hypothetical borrowers. For the 

borrower with the $25,000 loan, accounting for effects 

on taxes increases the subsidy rate under the fixedpayment plan by 3.7 percentage points, to –6.5 percent, 

and increases the subsidy rate under the income-driven 

plan by 5.5 percentage points, to –9.7 percent. For the 

borrower with the $50,000 loan, accounting for such 

effects increases the subsidy rate under the fixed-payment 

plan by 3.5 percentage points, to –6.7 percent; by 

contrast, it decreases the subsidy rate under the incomedriven plan by 1.7 percentage points, to 18.0 percent. In 

the last case, the subsidy shrinks because the effect of tax 

revenues from loan forgiveness (a 9.6 percentage-point 

decrease) exceeds the effect of deductions for interest (a 

7.9 percentage-point increase).

23. Deductions for student loan interest are based on borrowers’ 

interest payments, income, and filing status. The maximum 

deduction is $2,500; that cap is gradually reduced as borrowers’ 

income rises. For more information, see Internal Revenue Service, 

“Topic No. 456: Student Loan Interest Deduction” (accessed 

December 14, 2019), www.irs.gov/taxtopics/tc456.
2

Chapter 2: Borrowers and Loans 

in Income-Driven Repayment Plans

Both the number of borrowers and the total volume of 

loans in income-driven plans grew rapidly over the past 

decade as eligibility expanded and plans with more favorable terms were introduced. In 2017, roughly half of eligible borrowers’ student debt was being repaid through 

income-driven plans, and most borrowers enrolling in 

such plans were selecting the Pay as You Earn or Revised 

Pay as You Earn plan.

The share of debt repaid through income-driven plans 

has grown faster than the share of borrowers enrolled 

in those plans for two reasons. First, the borrowers in 

income-driven plans tend to have larger original loan 

balances than those in fixed-payment plans. For example, 

graduate borrowers take out much larger loans, on average, and are more likely to enroll in income-driven plans 

than undergraduate borrowers.1 Second, a considerable 

share of borrowers in such plans make payments that are 

too small to cover their accruing interest, so their loan 

balances grow over time. Despite their larger balances 

and slower repayment, borrowers in income-driven plans 

are less likely than borrowers in fixed-payment plans to 

default on their loans.

Growth in the Share of Borrowers and the 

Share of Loans

From 2010 to 2017, the share of all borrowers repaying direct loans through income-driven plans increased 

from 10 percent to 27 percent. The share of undergraduate borrowers in such plans increased from 11 percent (600,000 of 5.6 million borrowers) to 24 percent 

(4.6 million of 19.3 million borrowers; see Figure 2-1). 

The share of graduate borrowers increased from 6 percent (100,000 of 1.8 million borrowers) to 39 percent 

(1.8 million of 4.7 million borrowers). 

1. Undergraduate borrowers acquire loans for undergraduate study 

only; graduate borrowers may have undergraduate loans as well as 

graduate loans.

Over the same period, the share of outstanding directloan balances in income-driven plans increased even 

faster. Between 2010 and 2017, the total balance of loans 

in those plans grew from $24 billion, or 12 percent, to 

$384 billion, or 45 percent. By 2017, undergraduate 

borrowers were repaying $153 billion, or 34 percent, of 

their loans through income-driven plans; for graduate 

borrowers, the volume of loans in income-driven plans 

was $231 billion, or 56 percent (see Figure 2-2). Growth 

in the share of loans in such plans was particularly rapid 

after the PAYE plan was introduced in December 2012.

Changes in the Distribution of Loans Among 

Income-Driven Repayment Plans 

The distribution of outstanding loan volume among 

income-driven plans changed considerably between 2010 

and 2017 (see Figure 2-3 on page 16). Of the total 

volume of loans in income-driven plans, the share in 

the income-contingent repayment plan declined from 

about 80 percent to less than 10 percent. By contrast, the 

share in the income-based repayment plan, which had 

been introduced in 2009, grew quickly, amounting to 

about half the volume of loans in income-driven plans by 

2017. After the introduction of the PAYE and REPAYE 

plans in December 2012 and December 2015, respectively, the shares of loans in those plans also increased 

considerably. 

Categorizing borrowers into repayment cohorts, or 

groups based on the year in which they began repaying 

their loans, makes those trends more apparent.2 The 

share of student debt repaid through income-driven 

plans has risen over time for recent cohorts—those that 

began repaying loans from 2010 to 2014—and is likely 

to continue rising for those that began repaying loans 

between 2015 and 2017, in the Congressional Budget 

Office’s assessment. Among undergraduate borrowers 

in 2017, the share of the original volume of loans being 

2. The loans held by a given repayment cohort would have been 

disbursed over previous years.
14 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

repaid through income-driven plans was highest for the 

2014 repayment cohort, at 33 percent (see Figure 2-4 

on page 16). Among graduate borrowers in 2017, 

that share was highest for the 2015 repayment cohort, 

at 56 percent. (CBO expects shares in later cohorts 

to exceed those levels as borrowers switch from fixedpayment to income-driven plans.) Otherwise, the 

volume of loans has shifted from the original IBR plan 

to the PAYE plan and the updated IBR plan (for new 

borrowers on or after July 1, 2014) as borrowers in more 

recent cohorts have become eligible for those plans.

Differences Between Borrowers in 

Income-Driven and Fixed-Payment Plans 

Borrowers in income-driven plans have larger balances, on average, than borrowers in fixed-payment 

plans—mainly because borrowers in income-driven plans 

tend to take out larger loans and to repay those loans 

more slowly. However, their default rates are about half 

as high as those of borrowers in fixed-payment plans.

Part of the reason that borrowers in income-driven plans 

tend to have larger loan balances is that a disproportionate share of those borrowers are graduate students, who 

borrow more, on average, than undergraduates. In 2017, 

graduate borrowers comprised 30 percent of borrowers 

in income-driven repayment plans but only 15 percent 

of borrowers in fixed-payment plans. Those in incomedriven plans had received an average of $92,000 of loan 

disbursements; by contrast, those in fixed-payment plans 

had received $59,000, and undergraduate borrowers in 

income-driven and fixed-payment plans had received 

$25,100 and $18,500, respectively. 

Figure 2-1.

Borrowers With Direct Student Loans, by Type of Repayment Plan, 2010 to 2017

0

5

10

15

20

2010 2011 2012 2013 2014 2015 2016 2017

0

20

40

60

80

100

2010 2011 2012 2013 2014 2015 2016 2017

0

5

10

15

20

2010 2011 2012 2013 2014 2015 2016 2017

0

20

40

60

80

100

2010 2011 2012 2013 2014 2015 2016 2017

Income-Driven Plans

Undergraduate Borrowers

Graduate Borrowers

Millions of Borrowers Percentage of Borrowers

Millions of Borrowers Percentage of Borrowers

Fixed-Payment Plans

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System.
CHAPTER 2 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 15

Loans are often repaid more slowly under income-driven 

plans because the required payments are too small to 

cover the accruing interest. As a result, borrowers in 

such plans typically see their balance grow over time 

rather than being paid down. For example, the median 

balance of those who began repaying their loans in 

2012 increased as a percentage of the original disbursement for six years (see Figure 2-5 on page 17).3

 By the 

end of 2017, over 75 percent of those borrowers owed 

more than they had originally borrowed. By contrast, the 

median balance among borrowers in fixed-payment plans 

decreased steadily. 

Despite their larger balances and slower repayment, 

borrowers in income-driven plans default at lower rates 

3. CBO’s analysis excluded borrowers who defaulted on their loans.

than borrowers in fixed-payment plans. Among borrowers who began repaying their loans in 2012, those who 

enrolled in an income-driven plan by the end of 2013 

were about half as likely as those in fixed-payment plans 

to default on their loans by 2017 (see Figure 2-6 on 

page 17). 

Borrowers in income-driven plans could be less likely 

to default for various reasons. For example, given that 

borrowers are automatically enrolled in a 10-year fixedpayment plan unless they select another plan, those who 

choose other options may have greater financial literacy. 

Alternatively, borrowers in income-driven plans may be 

less likely to default because those plans keep payments 

at a more manageable level when borrowers have low 

income.

Figure 2-2.

Direct Student Loans, by Type of Repayment Plan, 2010 to 2017

0

100

200

300

400

500

2010 2011 2012 2013 2014 2015 2016 2017

0

20

40

60

80

100

2010 2011 2012 2013 2014 2015 2016 2017

0

100

200

300

400

500

2010 2011 2012 2013 2014 2015 2016 2017

0

20

40

60

80

100

2010 2011 2012 2013 2014 2015 2016 2017

Income-Driven Plans

 Undergraduate Borrowers’ Loans

Graduate Borrowers’ Loans

Billions of Dollars Percentage of Loan Volume

Billions of Dollars Percentage of Loan Volume

Fixed-Payment Plans

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System.
16 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

Figure 2-3.

Distribution of Student Debt in Income-Driven Repayment Plans, 2010 to 2017

Percent

0

20

40

60

80

100

2010 2011 2012 2013 2014 2015 2016 2017

Income-Contingent Repayment

Income-Based Repaymenta

PAYEb

REPAYE

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System. 

PAYE = Pay as You Earn; REPAYE = Revised Pay as You Earn.

a. Loans in this category are those repaid through the original income-based repayment plan, which covers borrowers who took out loans before 

July 1, 2014.

b. This category combines loans repaid through the PAYE plan with those repaid through the updated income-based repayment plan, which covers 

borrowers who first took out loans on or after July 1, 2014, and has very similar terms.

Figure 2-4.

Percentage of the Disbursed Volume of Loans in Each Income-Driven Plan in 2017, 

by Borrowers’ First Year of Repayment

Percent

Undergraduate Borrowers Graduate Borrowers

Income-Contingent Repayment

Income-Based Repaymenta

PAYEb

REPAYE

0

20

40

60

2011 2012 2013 2014 2015 2016 2017

0

20

40

60

2011 2012 2013 2014 2015 2016 2017

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System. 

PAYE = Pay as You Earn; REPAYE = Revised Pay as You Earn.

a. Loans in this category are those repaid through the original income-based repayment plan, which covers borrowers who took out loans before 

July 1, 2014.

b. This category combines loans repaid through the PAYE plan with those repaid through the updated income-based repayment plan, which covers 

borrowers who first took out loans on or after July 1, 2014, and has very similar terms.
CHAPTER 2 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 17

Figure 2-5.

Percentage of Original Balance Remaining for Borrowers Who Began Repaying Loans in 2012, 

by Type of Repayment Plan

Percent

0

50

100

150

2011 2012 2013 2014 2015 2016 2017

Median Amount Still Owed in 

Income-Driven Plans

Median Amount Still Owed in 

Fixed-Payment Plans

25th to 75th 

Percentiles

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System. 

CBO examined borrowers who began repaying their loans in 2012 because the number of borrowers and the volume of loans in income-driven plans 

had begun increasing by that year and the borrowers’ payments for the next several years could be observed. Borrowers who defaulted on their loans 

were excluded from the analysis.

Figure 2-6.

Cumulative Default Rates of Borrowers Who Began Repaying Loans in 2012, by Type of Repayment Plan

Percent

0

10

20

30

40

0 1 2 3 4 5 6

0

10

20

30

40

0 1 2 3 4 5 6

Income-Driven 

Plans

Fixed-Payment 

Plans

Undergraduate Borrowers Graduate Borrowers

2011 2012 2013 2014 2015 2016 2017 2011 2012 2013 2014 2015 2016 2017

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System. 

In this figure, borrowers are categorized as repaying through an income-driven plan if they were enrolled in such a plan in their first or second year of 

repayment.

3

Chapter 3: The Budgetary Costs of Income-Driven 

Repayment Plans

The Congressional Budget Office projects that $1.05 trillion in student loans will be disbursed between 2020 

and 2029, increasing the deficit by $10.7 billion during 

that period.1 That increase is largely due to loans in 

income-driven repayment plans, which are projected 

to result in costs to the government, rather than loans 

in fixed-payment plans, which are projected to result 

in gains. Specifically, CBO projects that $490.4 billion 

in student loans disbursed over the 2020–2029 period 

will be repaid through income-driven plans, with 

a lifetime cost to the government of $82.9 billion. 

By contrast, $562.7 billion of loans will be repaid 

through fixed-payment plans, with a lifetime cost of 

−$72.2 billion.2

To estimate the costs of student loans in income-driven 

plans, CBO projected the expected cash flows from those 

loans over the duration of their repayment. To that end, 

CBO projected the earnings and resulting loan payments 

of borrowers enrolled in the plans, using historical information on recent borrowers. (For more details on CBO’s 

analytic method, see Appendix B.)

Several factors explain the larger projected costs of 

loans repaid through income-driven plans. In CBO’s 

assessment, borrowers who enroll in such plans take 

out larger loans and have less income, on average, than 

borrowers in fixed-payment plans. Because payments in 

income-driven plans are a percentage of the borrowers’ 

income, many of those borrowers are expected to make 

reduced payments. A considerable share of their loans 

1. This report focuses on Stafford loans to undergraduate and 

graduate students and PLUS loans to graduate students. PLUS 

loans to the parents of students are not eligible for repayment 

through most income-driven plans and have been excluded from 

the analysis. In August 2019, CBO estimated that $156 billion of 

such loans would be disbursed between 2020 and 2029; because 

the rate of repayment for those loans is expected to be relatively 

high, CBO projected that they would decrease the deficit by 

$48.2 billion.

2. The estimates in this report exclude the administrative costs of 

disbursing and servicing loans. 

is also expected to be forgiven. For those reasons, loans 

in income-driven repayment plans are projected to have 

higher subsidy rates—that is, greater costs as a share of 

loan dollars disbursed—than loans in fixed-payment 

plans over the next 10 years. 

How the Cost of Student Loans Is Calculated 

CBO calculates the costs of the student loan program 

following the procedures specified in the Federal Credit 

Reform Act of 1990. FCRA estimates are used in the 

federal budget for most credit programs, including the 

student loan program. CBO prepares fair-value estimates 

as well to provide a more comprehensive picture of the 

programs’ long-term costs.3 (For information about those 

estimates, see Box 3-1.) This report focuses on costs 

estimated under FCRA rules because CBO uses those 

estimates in its baseline budget projections.

Under FCRA, a loan’s lifetime cost to the government is 

described as a subsidy. It is measured by projecting all of 

the expected future cash flows associated with the loan 

and then discounting those projected cash flows to their 

present value at the date the loan is disbursed (for an 

example, see Appendix A).

4

 (Discounting reflects the fact 

that a dollar collected in the future is less valuable than a 

dollar today.) A positive subsidy means that the loan has a 

net cost. A negative subsidy means that the present value 

of all future cash flows from the loan, including interest 

and fees, exceeds the government’s cost of making the 

loan—in other words, the loan results in a net gain.5

3. Those fair-value estimates are provided as supplemental 

information, as requested by the Congress most recently in the 

House’s budget resolution, H. Con. Res. 71, in October 2017. 

4. Following FCRA guidelines, CBO discounts cash flows 

associated with loans using interest rates on Treasury securities 

from the year the loans were disbursed.

5. For information on how the budgetary treatment of credit 

programs differs from that of noncredit programs, see 

Congressional Budget Office, Cash and Accrual Measures 

in Federal Budgeting (January 2018), www.cbo.gov/

publication/53461.
20 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

Box 3-1.

Fair-Value Estimates of the Cost of Student Loans

The Congressional Budget Office measures the costs of the 

student loan program using two approaches: a standard 

approach based on the procedures required by the Federal 

Credit Reform Act of 1990 (FCRA) and, when requested, an 

alternative fair-value approach. Under the FCRA approach, 

estimated costs are the average projected cash flows of the 

program, discounted using interest rates on Treasury securities, which reflect the cost of the debt the government issues 

to fund the loans. Under the fair-value approach, estimated 

costs further reflect the compensation a private investor would 

require to undertake the risk of making those loans. In CBO’s 

view, those estimates are a more comprehensive measure of 

the costs of student loans than FCRA estimates. 

The costs of the student loan program appear lower when 

estimated using FCRA procedures because they do not include 

the cost of market risk, which is the risk that arises because 

borrowers are more likely to default on their debt obligations 

when the economy is weak. Fair-value estimates account for 

the cost of that financial risk as expressed through approximations of market prices—in particular, the higher interest rates 

that private lenders would charge if they were to offer loans 

with similar terms. Fair-value estimates can help policymakers 

understand trade-offs when considering some different types 

of legislation.

For federal loans issued to students over the 2020–

2029 period, the average projected subsidy rate (that is, the 

cost as a share of the originally disbursed amount) is 1 percent 

when measured under the FCRA approach but 25 percent 

when measured under the fair-value approach (see the table). 

The higher fair-value estimate reflects the fact that a private 

lender would require borrowers to pay an interest rate that 

compensated for the market risk associated with the loans; the 

loan is subsidized in the sense that the government charges 

borrowers a lower rate than they would receive from private 

lenders. 

Income-driven plans involve more market risk than 

fixed-payment plans because of their formulas for required 

payments and their forgiveness of borrowers’ unpaid balances. 

If the economy performs poorly, borrowers’ earnings will be 

more likely to decrease, lowering their required payments 

under income-driven plans. Those reduced payments will 

eventually lead to more loan forgiveness. (That additional risk 

is partly offset because borrowers in income-driven plans are 

less likely than borrowers in fixed-payment plans to default on 

their loans.) Under the FCRA approach, the average projected 

subsidy rate is −12.8 percent for loans in fixed-payment plans 

and 16.9 percent for loans in income-driven plans. Under the 

fair-value approach, the average projected subsidy rate is 

9.1 percent for loans in fixed-payment plans and 43.1 percent 

for loans in income-driven plans. The difference is larger under 

the fair-value approach because the estimates account for 

market risk.

FCRA Estimate Fair-Value Estimate

All Federal Loans

Subsidy (Billions of dollars) 11 263

Subsidy rate (Percent) 1.0 25.0

Loans in Fixed-Payment Plans

Subsidy (Billions of dollars) -72 51

Subsidy rate (Percent) -12.8 9.1

Loans in Income-Driven Plans

Subsidy (Billions of dollars) 83 212

Subsidy rate (Percent) 16.9 43.1

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System.

A subsidy rate expresses the subsidy cost of a loan in cents per dollar disbursed. Like the subsidy cost, it reflects the value of all future 

cash flows associated with the loan. Under the FCRA approach, those cash flows are discounted to their net value at the time of the loan’s 

disbursement using interest rates on Treasury securities and represent the budgetary effect of the loans. Under the fair-value approach, the 

cash flows are discounted using interest rates in the private market.

FCRA = Federal Credit Reform Act of 1990.
CHAPTER 3 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 21

To estimate the cost of the student loan program under 

FCRA, CBO allocates payments from borrowers to the 

loans they took out while in school. Borrowers with multiple loans generally make just one monthly payment, 

even if they took out different types of loans in different 

years. For example, a student pursuing an undergraduate degree might take out both subsidized Stafford and 

unsubsidized Stafford loans over four years and repay all 

of those loans together in an income-driven plan. CBO 

proportionally allocates amounts from such payments to 

each of the borrower’s original loans, using weights that 

are based on each loan’s outstanding balance and interest 

rate.

Student loan repayment plans affect the budget not only 

through their subsidy costs but through their effect on 

tax revenues. In both fixed-payment and income-driven 

plans, student loan interest may be tax deductible in the 

tax year in which it is paid. Those tax deductions reduce 

federal revenues. In addition, borrowers whose loans are 

forgiven must include the unpaid balance in their taxable income for that year (unless the loans are forgiven 

through the Public Service Loan Forgiveness program). 

Income taxes forgone through deductions for interest 

payments or collected on forgiven balances are not 

included in the estimated budgetary costs of the incomedriven repayment program in this report.

Projected Subsidy Rates for Loans Repaid 

Through Income-Driven Plans

In CBO’s projections, loans disbursed from 2020 to 

2029 and repaid through income-driven plans have an 

average subsidy rate of 16.9 percent. By contrast, loans 

repaid through fixed-payment plans have an average subsidy rate of −12.8 percent. In other words, for every dollar spent on loans that are repaid through income-driven 

plans, the government is expected to lose 16.9 cents, and 

for every dollar spent on loans that are repaid through 

fixed-payment plans, it is expected to gain 12.8 cents.

Estimates of the subsidy cost of loans in income-driven 

plans include loans forgiven through the PSLF program. 

Because the PSLF program speeds up the forgiveness 

of loans, borrowers in the program may make far fewer 

payments than they otherwise would have. As a result, 

the average subsidy rates are much higher for their loans 

than for other loans in income-driven plans—which 

pushes up the average costs for all the loans. 

Projected subsidy rates differ for undergraduate and 

graduate borrowers. Over the 2020–2029 period, loans 

in income-driven plans are projected to have average subsidy rates of 15.9 percent for undergraduate borrowers 

and 17.5 percent for graduate borrowers (see Table 3-1). 

(Appendix C provides separate projections for subsidized 

Stafford loans, unsubsidized Stafford loans to undergraduate and graduate students, and PLUS loans to graduate 

students.) 

Projected subsidy rates also differ for loans in different 

income-driven repayment plans (see Table 3-2). (For 

projected subsidy rates for different types of loans, see 

Appendix C.) In CBO’s projections, loans in the original 

income-based repayment plan have the lowest subsidy 

rates, on average, because that plan requires borrowers 

to pay a larger share of their earnings for a longer period 

of time than the Pay as You Earn or Revised Pay as You 

Earn plans. (For this analysis, CBO excluded loans 

repaid through the income-contingent repayment plan 

because very few recent borrowers are enrolled in that 

plan.)6 Average projected subsidy rates are highest for 

loans in the PAYE plan.

The PAYE and REPAYE plans have similar terms, but 

two differences make subsidy rates lower, on average, 

for loans in the REPAYE plan. First, the PAYE plan 

caps payments at the amount a borrower would owe in 

the standard 10-year fixed-payment plan. By contrast, 

payments in the REPAYE plan are not capped, which 

means that borrowers end up repaying a larger share of 

their principal before their loans are forgiven. Second, 

all borrowers in the PAYE plan receive loan forgiveness 

after 20 years of repayment, but for graduate borrowers 

in the REPAYE plan, loan forgiveness takes 25 years. 

That longer repayment term reduces the subsidy rates 

for graduate borrowers’ loans. A third difference partly 

offsets those two effects: The REPAYE plan’s interest 

subsidy reduces borrowers’ unpaid interest by half, which 

reduces some borrowers’ total payments.

Forgiveness of Loans in Income-Driven Plans

Because loan forgiveness ends borrowers’ payments, 

it reduces cash flows to the government and raises the 

subsidy cost of the student loan program. Borrowers 

6. Generally, borrowers select the ICR plan only if it is the sole 

income-driven plan for which they are eligible, as is the case for 

borrowers whose consolidation loan includes a parent’s PLUS 

loan. 
22 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

in income-driven plans receive forgiveness of their 

outstanding balances after 20 or 25 years of qualifying payments. Borrowers in the PSLF program receive 

forgiveness after 10 years of payments if they work for 

public-service employers throughout that period. 

CBO projects that a greater share of graduate borrowers’ 

loans than undergraduate borrowers’ loans will be forgiven. Graduate borrowers are projected to hold 50 percent of the volume of student loans disbursed from 2020 

to 2029—including 61 percent of the volume of loans in 

income-driven plans—but to account for 81 percent of 

the amount that is forgiven. 

For loans disbursed to undergraduate students between 

2020 and 2029, CBO estimates that an outstanding 

balance of $40.3 billion, in present-value terms, will 

ultimately be forgiven.7 For loans made to graduate 

students over the same period, CBO estimates that the 

forgiven balance will be much larger, amounting to 

$167.1 billion in present-value terms. Those forgiven 

balances represent 21 percent of the amount disbursed to 

undergraduate borrowers and 56 percent of the amount 

disbursed to graduate borrowers (see Table 3-3). For 

comparison, the present value of the payments on those 

loans is projected to equal 84 percent of the amount 

disbursed to undergraduate borrowers and 82 percent 

7. Forgiven amounts are discounted to their present value in the 

year the loans were disbursed, using the discount rates that are 

used to discount cash flows under FCRA. The undiscounted 

forgiven amounts are $84.6 billion for loans to undergraduate 

students and $342.8 billion for loans to graduate students.

Table 3-1.

Volume and Subsidy Rates of Loans, by Type of Repayment Plan, 2020 to 2029

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

2020–

2029a

All Federal Loans

Loans to Undergraduate Borrowers

Volume (Billions of dollars) 45.4 46.6 48.1 49.7 51.6 53.3 55.1 57.1 59.2 61.5 527.5

Subsidy rate (Percent) 1.4 3.7 4.6 4.9 4.9 4.9 4.9 4.8 4.7 4.7 4.4

Loans to Graduate Borrowers

Volume (Billions of dollars) 42.6 44.7 47.0 49.3 51.2 53.4 55.7 58.1 60.6 63.1 525.7

Subsidy rate (Percent) -6.0 -2.6 -1.7 -1.8 -1.8 -2.1 -1.8 -2.5 -2.3 -2.0 -2.4

Loans in Fixed-Payment Plans

Loans to Undergraduate Borrowers

Volume (Billions of dollars) 27.9 28.8 29.8 31.0 32.4 33.7 35.1 36.7 38.4 40.3 334.0

Subsidy rate (Percent) -5.3 -3.3 -2.3 -2.0 -2.0 -1.8 -1.8 -1.7 -1.7 -1.6 -2.3

Loans to Graduate Borrowers

Volume (Billions of dollars) 18.1 19.1 20.1 21.2 22.1 23.3 24.4 25.6 26.8 28.1 228.7

Subsidy rate (Percent) -31.4 -29.0 -28.2 -28.0 -28.0 -27.9 -27.9 -27.9 -27.8 -27.6 -28.3

Loans in Income-Driven Plans

Loans to Undergraduate Borrowers

Volume (Billions of dollars) 17.5 17.8 18.3 18.7 19.2 19.6 20.0 20.4 20.8 21.2 193.5

Subsidy rate (Percent) 12.1 14.8 15.9 16.3 16.4 16.5 16.7 16.7 16.6 16.6 15.9

Loans to Graduate Borrowers

Volume (Billions of dollars) 24.5 25.6 26.9 28.1 29.0 30.1 31.3 32.5 33.8 35.0 297.0

Subsidy rate (Percent) 12.9 17.1 18.1 18.0 18.1 17.8 18.6 17.4 17.8 18.6 17.5

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System. 

A subsidy rate reflects the government’s cost for a loan in cents per dollar disbursed. By law, the costs of federal student loans are measured using 

procedures prescribed in the Federal Credit Reform Act of 1990. Subsidy costs do not include the administrative costs of disbursing and servicing 

loans. 

Loans in income-driven plans include loans that receive forgiveness through the Public Service Loan Forgiveness program.

a. Values for the volume of loans are cumulative totals; values for subsidy rates are averages.
CHAPTER 3 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 23

of the amount disbursed to graduate borrowers.8 (See 

Appendix C for separate projections for subsidized 

Stafford loans, unsubsidized Stafford loans to undergraduate and graduate students, and PLUS loans to graduate 

students.)

Differences by Borrowers’ Academic Level

The difference in projected loan forgiveness for undergraduate and graduate borrowers is driven by two factors. 

First, graduate students borrow much more, on average, 

than undergraduate students. Although graduate borrowers are also projected to have greater lifetime earnings, 

CBO expects that a larger share of those borrowers will 

have income too low to fully repay their loans through 

income-driven plans. Second, interest rates are considerably higher for loans to graduate students than loans to 

undergraduate students. Compared with Stafford loans 

to undergraduate students, Stafford loans to graduate 

students have interest rates that are 1.55 percentage 

points higher, and PLUS loans to graduate students have 

interest rates that are 2.55 percentage points higher. 

Those higher interest rates cause unpaid interest to 

accrue at faster rates for graduate students’ loans. 

8. Those percentages sum to more than 100 percent because both 

the forgiven and repaid amounts include accrued interest, and 

the loan interest rates are higher than the discount rates.

That faster accrual of interest, combined with required 

payments that do not cover the accruing interest, can 

lead graduate borrowers’ debt burden to increase over 

time. As a result, CBO expects that graduate borrowers 

in income-driven plans will be more likely than undergraduate borrowers to have outstanding balances larger 

than the amount they originally borrowed—at least in 

the initial years of repayment. Such borrowers are also 

likely to have more debt forgiven.

Differences by Borrowers’ Original Balances and 

Earnings

On average, borrowers who take out larger loans are 

projected to have a larger share of their original balance 

forgiven. CBO projects that over the 2020–2029 period, 

undergraduate borrowers who take out the smallest loans 

(those in the lowest quintile, or fifth, of the distribution 

of original loan balances) will have an average of $40, or 

1 percent of the disbursed amount, forgiven; for graduate borrowers, that amount is $700, or 2 percent of the 

disbursed amount. (Those quintiles include borrowers in 

fixed-payment plans, who necessarily receive no forgiveness.) By contrast, undergraduate borrowers who take 

out the largest loans (those in the highest quintile) are 

projected to have an average of $6,000, or 12 percent of 

the disbursed amount, forgiven; for graduate borrowers, 

that amount is $118,000, or 53 percent of the disbursed 

amount. 

Table 3-2.

Average Subsidy Rates, by Type of Loan and Repayment Plan, 2020 to 2029

Percent

IBRa PAYEb REPAYE

Loans to Undergraduate Borrowers 4.2 17.0 13.6

Loans to Graduate Borrowers -6.2 20.9 13.5

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System.

A subsidy rate reflects the government’s cost for a loan in cents per dollar disbursed. By law, the costs of federal student loans are measured using 

procedures prescribed in the Federal Credit Reform Act of 1990. Subsidy costs do not include the administrative costs of disbursing and servicing 

loans.

CBO excluded one payment plan—the income-contingent repayment plan—from its estimates because the share of borrowers enrolled in that plan is 

very small.

IBR = income-based repayment; PAYE = Pay as You Earn; REPAYE = Revised Pay as You Earn.

a. Loans in this category are those repaid through the original income-based repayment plan, which covers borrowers who took out loans before 

July 1, 2014.

b. This category combines loans repaid through the PAYE plan with those repaid through the updated income-based repayment plan, which covers 

borrowers who first took out loans on or after July 1, 2014, and has very similar terms.
24 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

In addition, among students who borrow similar 

amounts, those with lower earnings are projected to have 

a greater share of their loans forgiven (see Figure 3-1). 

For instance, among graduate students who take out 

the largest loans, those with the lowest earnings (in the 

bottom quintile of the distribution of earnings) are 

projected to have an average of $161,000, or 77 percent 

of their disbursed amount, forgiven, whereas those with 

the highest earnings (in the top quintile) are projected 

to have an average of $57,000, or 21 percent of their 

disbursed amount, forgiven.

Accounting for differences in the size of loans, CBO also 

expects a greater share of forgiven student debt to be held 

by borrowers with the lowest earnings (see Figure 3-2). 

However, that pattern is weaker for graduate borrowers 

with large loans. Among graduate borrowers who take 

out the largest loans (totaling $122,000 or more), those 

with the highest earnings (above $114,000 per year) are 

projected to hold 9 percent of the forgiven debt. By contrast, among undergraduate borrowers who take out the 

largest loans (totaling $32,000 or more), those with the 

highest earnings (above $69,000 per year) are projected 

to hold only 3 percent of the forgiven debt.

Effects of Loan Forgiveness on Tax Revenues

Although loan forgiveness stops a borrower’s payments, 

it still results in tax revenues in most cases because the 

forgiven amount is included in the borrower’s taxable 

income. In the budget, the effects of tax revenues are 

recorded in the year those taxes are collected. Taxes on 

the forgiven balances of loans issued between 2020 and 

2029 will be collected in 2040 at the earliest.Thus, 

CBO’s estimates of the costs of student loans exclude 

those effects.

However, including those effects in estimates of the 

loans’ lifetime costs to the government could be informative to policymakers. In CBO’s assessment, doing 

so would reduce the average subsidy rate of loans in 

income-driven plans. 

To approximate the present value of revenues from 

forgiven loans, one would multiply the average effective 

Table 3-3.

Disbursed, Forgiven, and Paid Amounts of Loans Issued From 2020 to 2029 and Repaid Through 

Income-Driven Plans

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

2020–

2029a

Loans to Undergraduate Borrowers

Disbursement (Billions of dollars) 17.5 17.8 18.3 18.7 19.2 19.6 20.0 20.4 20.8 21.2 193.5

Forgiven Balance (Billions of dollars) 4.2 4.0 3.9 3.9 4.0 4.0 4.1 4.1 4.0 4.1 40.3

Percentage of Disbursement Forgiven 23.9 22.7 21.4 21.1 20.7 20.7 20.4 19.9 19.4 19.3 20.9

Percentage of Disbursement Repaid 87.9 85.2 84.1 83.7 83.6 83.5 83.3 83.3 83.4 83.4 84.1

Loans to Graduate Borrowers

Disbursement (Billions of dollars) 24.5 25.6 26.9 28.1 29.0 30.1 31.3 32.5 33.8 35.0 297.0

Forgiven Balance (Billions of dollars) 15.5 15.4 15.4 15.8 16.3 16.4 17.1 17.6 18.2 19.4 167.1

Percentage of Disbursement Forgiven 63.3 60.1 57.1 56.2 56.1 54.3 54.5 54.1 53.9 55.5 56.3

Percentage of Disbursement Repaid 87.1 82.9 81.9 82.0 81.9 82.2 81.4 82.6 82.2 81.4 82.5

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System.

Loans in income-driven plans include loans that are forgiven through the Public Service Loan Forgiveness program.

Forgiven debt and payments are expressed as present values. To calculate those present values, CBO used the interest rates on Treasury securities to 

translate future cash flows into current dollars in the years loans would be disbursed.

Forgiven balances and payments add up to more than 100 percent because they include accrued interest.

a. Values for disbursements and forgiven balances are cumulative totals; values for the percentage of disbursements forgiven or repaid are averages.
CHAPTER 3 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 25

tax rate that would apply to the forgiven balances 

included in borrowers’ income by the present value of 

those balances.9 For example, if the average effective tax 

rate would be 20 percent and the present value of the 

9. This calculation incorporates the assumption that borrowers 

would pay the tax on their forgiven balances. However, because 

borrowers whose loans are forgiven are likely to have lower 

income, they might be unable to pay the tax, which could be 

several times larger than their average annual loan payment. 

If borrowers did not pay the tax in full, the Internal Revenue 

Service would start a collection process. Borrowers could apply 

to pay through an installment plan or have the amount they owe 

reduced if paying it would be an economic hardship. 

forgiven balances was equal to 50 percent of the original 

loans, then the present value of the expected tax revenues 

from forgiveness would equal 10 percent of the disbursed 

amount. Thus, including those revenues in the subsidy 

estimate would reduce the subsidy rate by 10 percentage 

points.10 (That calculation cannot be directly applied to 

the results in Table 3-3 because the forgiven amounts 

shown there include balances forgiven under the PSLF 

program, which are not taxable.)

10. Many borrowers in income-driven plans pay more interest than 

they would in fixed-payment plans and can therefore deduct 

more from their taxes. Those deductions would partially offset 

the revenues obtained through taxing loan forgiveness. 

Figure 3-1.

Forgiveness of Loans Issued From 2020 to 2029, by Borrowers’ Projected Earnings and Original Balance

Undergraduate Borrowers Graduate Borrowers

Low High Low High

Low

High

Original

Balance

Earnings

20 40 60

Percentage of Disbursed Amount Forgiven

Undergraduate Borrowers Graduate Borrowers

Low High Low High

Low

High

Original

Balance

Earnings

0 20 40 60 80

Percentage of Disbursed Amount Forgiven

Forgiven Amount

(Percentage of original balance) 

Source: Congressional Budget Office.

Each square represents borrowers in one quintile, or fifth, of the distribution of projected earnings and one quintile of the distribution of original loan 

balances. Those quintiles include borrowers in fixed-payment plans, who are not eligible for loan forgiveness, and borrowers in the Public Service Loan 

Forgiveness program.

Earnings and original loan balances were measured in 2020 dollars. Forgiven amounts were discounted to their present value in the year of the loans’ 

disbursement, using the interest rates on Treasury securities.

Earnings were calculated as projected average annual earnings within the first 20 years after borrowers began repaying their loans. Earnings in the 

lowest quintile are under $22,000 per year for undergraduate borrowers and under $40,000 per year for graduate borrowers; earnings in the highest 

quintile are $69,000 or more per year for undergraduate borrowers and $114,000 or more per year for graduate borrowers.

Original loan balances in the lowest quintile are $6,000 or less for undergraduate borrowers and $37,000 or less for graduate borrowers. Original loan 

balances in the highest quintile are over $32,000 for undergraduate borrowers and over $122,000 for graduate borrowers.
26 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

Figure 3-2.

Distribution of Forgiven Student Debt Issued From 2020 to 2029, by Borrowers’ Projected Earnings and 

Original Balance

Percent

0

20

40

60

80

100

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile

0

20

40

60

80

100

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile

Lowest Earnings

Highest Earnings

Undergraduate Borrowers

Graduate Borrowers

Original Balance

Original Balance

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System. 

Each borrower is grouped into one quintile, or fifth, of the distribution of projected earnings and one quintile of the distribution of original loan 

balances. Those quintiles include borrowers in fixed-payment plans, who are not eligible for loan forgiveness, and borrowers in the Public Service Loan 

Forgiveness program.

Earnings and original loan balances were measured in 2020 dollars. Forgiven amounts were discounted to their present value in the year of the loans’ 

disbursement, using the interest rates on Treasury securities. 

Earnings were calculated as projected average annual earnings within the first 20 years after borrowers began repaying their loans. Earnings in the 

lowest quintile are under $22,000 per year for undergraduate borrowers and under $40,000 per year for graduate borrowers; earnings in the highest 

quintile are $69,000 or more per year for undergraduate borrowers and $114,000 or more per year for graduate borrowers.

Original loan balances in the lowest quintile are $6,000 or less for undergraduate borrowers and $37,000 or less for graduate borrowers. Original loan 

balances in the highest quintile are over $32,000 for undergraduate borrowers and over $122,000 for graduate borrowers.
4

Chapter 4: Policy Options

The Congressional Budget Office analyzed two broad 

sets of policy options that would modify income-driven 

repayment plans: options that would change the availability of such plans and options that would change how 

borrowers’ required payments are calculated. The options 

CBO analyzed are either similar to policies lawmakers 

have considered in the past or useful for illustrating 

how certain aspects of the plans affect the budget. CBO 

estimated how each of the options would affect the cost 

of the student loan program over the next 10 years, using 

procedures prescribed by the Federal Credit Reform Act 

of 1990.1 (Estimates of the options’ costs on a fair-value 

basis are available as supplemental material accompanying this report.)

The options in the first category would change the availability of income-driven plans by:

• Making the Revised Pay as You Earn plan the only 

income-driven repayment plan,

• Making that plan the only repayment plan in the 

student loan program, or

• Eliminating income-driven repayment plans 

altogether.

All of the options in the second category would be combined with that first option—making the REPAYE plan 

the only income-driven repayment plan—and would 

change borrowers’ payments by:

• Adjusting the share of discretionary income used to 

calculate required loan payments,

• Adjusting the definition of discretionary income, or

• Adjusting the timing of loan forgiveness.

1. Effects on the administrative costs of disbursing or servicing loans 

or on tax revenues are not included in the estimates.

The costs of the options in the first category are measured in relation to CBO’s August 2019 baseline projections. The costs of options in the second category are 

measured in relation to the cost of the first option. 

Considerable uncertainty surrounds the budgetary effects 

of all the options. In general, CBO expects that borrowers would be more likely to enroll in income-driven plans 

under policies that made the terms more favorable and 

less likely to enroll under policies that made the terms 

less favorable. CBO adjusted the estimated costs of loans 

under the options to account for such behavioral effects. 

However, each option could alter students’ incentives 

and affect whether they took out loans, how much they 

borrowed, or whether they chose to attend school at all.2

That is especially true for the options that would bring 

about the most dramatic changes (eliminating incomedriven repayment plans or making the REPAYE plan 

mandatory). Most of the estimates in this report do not 

account for those complex factors. (The only exception is 

the estimate for the policy to eliminate all income-driven 

repayment plans, which incorporates a small decrease in 

borrowing for graduate school.) 

Costs are presented separately for loans to undergraduate 

students and loans to graduate students. Approximate 

costs of policies that would affect undergraduate and 

graduate students differently can be estimated by combining the cost of one policy for undergraduate students with the cost of another for graduate students. 

For example, the cost of expediting loan forgiveness for 

undergraduate borrowers and delaying it for graduate 

borrowers can be approximated by combining the corresponding estimates.3

2. For a discussion of how federal student aid affects incentives 

to obtain higher education, see Congressional Budget Office, 

Federal Aid for Postsecondary Students (June 2018), www.cbo.gov/

publication/53736.

3. That combination would only approximate the total cost because 

the policy for graduate borrowers would apply to loans they took 

out for undergraduate study. 
28 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

Options That Would Change the Availability 

of Income-Driven Repayment Plans 

The three options examined here would simplify incomedriven repayment, expand the use of income-driven 

repayment plans, or eliminate them altogether. Each of 

the policies would apply to borrowers who took out their 

first loan on or after July 1, 2020. The effect of the policies would increase over time as a greater share of loans 

was held by those borrowers.

The first two options would make the REPAYE plan 

the only income-driven plan. CBO focused on that 

plan because it is the newest income-driven repayment 

plan and because, like plans proposed in the President’s 

budget for fiscal year 2020 and by the Promoting Real 

Opportunity, Success, and Prosperity through Education 

Reform (PROSPER) Act (H.R. 4508), Aim Higher Act 

(H.R. 6543), and College Affordability Act (H.R. 4674), 

it does not cap borrowers’ payments.

Make the REPAYE Plan the Only Income-Driven 

Repayment Plan

Many policy proposals have sought to simplify incomedriven repayment by reducing borrowers’ options to a 

single income-driven plan.4 Some borrowers are eligible 

for three or four different plans, and difficulties in choosing one may discourage those borrowers from enrolling 

in any of them. Under this option, the REPAYE plan 

would be the only income-driven plan available to borrowers who took out their first loan on or after July 1, 

2020. 

Under this option, the subsidy (or lifetime cost to the 

government) of loans issued from 2020 to 2029 would 

fall by $22.7 billion, in CBO’s estimation—$4.4 billion 

for undergraduate borrowers’ loans and $18.3 billion for 

graduate borrowers’ loans (see Table 4-1). Costs would 

fall because, in CBO’s assessment, most new borrowers 

would otherwise have enrolled in the PAYE plan, and 

subsidy rates for loans in that plan are about 5 percentage points higher, on average, than for loans repaid 

through the REPAYE plan. (In other words, for each 

dollar disbursed, the government spends about 5 cents 

4. CBO provided estimates of such proposals in An Analysis 

of the President’s 2020 Budget (May 2019), www.cbo.gov/

publication/55195; cost estimate for H.R. 4508, Promoting Real 

Opportunity, Success, and Prosperity through Education Reform 

Act (February 6, 2018), www.cbo.gov/publication/53547; 

and cost estimate for H.R. 4674, College Affordability Act 

(December 10, 2019), www.cbo.gov/publication/55939. 

less for loans that are repaid through the REPAYE plan.) 

In 2029, the policy would apply to almost all new loans 

because almost all borrowers in that year would have first 

borrowed after July 1, 2020, as required for the policy 

to apply. Average subsidy rates would be 1.1 percentage 

points lower for undergraduate borrowers’ loans and 

5.3 percentage points lower for graduate borrowers’ loans 

(see Table 4-2).

Make the REPAYE Plan the Only Repayment Plan

Under current law, if borrowers do not select a plan at 

the start of their repayment period, they are automatically enrolled in the standard repayment plan, in which 

borrowers fully pay off their loan balance after 10 years 

of fixed monthly payments. Borrowers can select other 

plans for which they are eligible, but some research has 

suggested that borrowers are not aware of their options. 

In 2015, for example, the Government Accountability 

Office advised the Department of Education to consistently and regularly notify borrowers about incomedriven repayment plans because many borrowers who 

would benefit from the plans were not participating in 

them.5

Under this option, borrowers who took out their first 

loan on or after July 1, 2020, would automatically be 

enrolled in the REPAYE plan when their repayment 

period began and could not choose any other plan. The 

policy would make the student loan program more like 

the student loan programs of countries such as Australia 

and the United Kingdom, where the only available 

repayment plans are income-driven plans (see Box 1-1 on 

page 7). It would also prevent borrowers who would 

benefit from such plans from failing to enroll because of 

a lack of information.

In CBO’s estimation, making the REPAYE plan the 

only repayment plan would increase the subsidy cost 

of loans disbursed over the 2020–2029 period by 

$33.5 billion—$16.0 billion for loans to undergraduate 

students and $17.6 billion for loans to graduate students 

(see Table 4-1). In 2029, when the policy would apply 

to almost all new loans, the average subsidy rates for 

loans to undergraduate and graduate students would be 

5. See Government Accountability Office, Education Could Do More 

to Help Ensure Borrowers Are Aware of Repayment and Forgiveness 

Options, GAO-15-663 (August 25, 2015), www.gao.gov/

products/GAO-15-663. 
CHAPTER 4 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 29

Table 4-1.

Change in the Subsidy Cost of Student Loans Under Options That Would Change 

Income-Driven Repayment, 2020 to 2029

Billions of Dollars

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Total, 

2020–

2029

Options That Would Change the Availability of Income-Driven Repayment Plansa

Make REPAYE the Only Income-Driven Repayment Plan

Undergraduate borrowers’ loans -0.2 -0.2 -0.3 -0.3 -0.4 -0.5 -0.6 -0.6 -0.7 -0.7 -4.4

Graduate borrowers’ loans -0.3 -0.7 -0.9 -1.2 -1.5 -1.9 -2.3 -2.8 -3.2 -3.4 -18.3

Make REPAYE the Only Repayment Plan

Undergraduate borrowers’ loans 0.4 0.5 0.8 1.1 1.4 1.7 2.0 2.4 2.7 2.9 16.0

Graduate borrowers’ loans 0.3 0.6 0.9 1.2 1.6 1.9 2.4 2.6 2.9 3.1 17.6

Eliminate All Income-Driven Repayment Plans

Undergraduate borrowers’ loans -1.0 -1.2 -1.5 -1.9 -2.3 -2.7 -3.2 -3.6 -3.8 -3.9 -25.1

Graduate borrowers’ loans -2.2 -4.1 -5.4 -6.9 -8.6 -10.3 -12.4 -14.1 -15.9 -17.0 -96.9

Options That Would Change How Borrowers’ Payments Are Calculatedb

Adjust the Share of Discretionary Income Used to 

Calculate Monthly Payments

Increase to 12 percent

Undergraduate borrowers’ loans -0.2 -0.2 -0.3 -0.3 -0.4 -0.4 -0.5 -0.5 -0.6 -0.6 -4.0

Graduate borrowers’ loans -0.4 -0.6 -0.8 -1.1 -1.4 -1.6 -1.9 -2.2 -2.5 -2.6 -15.1

Decrease to 8 percent

Undergraduate borrowers’ loans 0.2 0.3 0.4 0.5 0.6 0.6 0.7 0.8 0.8 0.8 5.8

Graduate borrowers’ loans 0.5 0.9 1.1 1.5 1.9 2.2 2.7 3.1 3.4 3.5 20.7

Adjust the Definition of Discretionary Income

Exclude AGI under 125 percent of the federal poverty 

guideline

Undergraduate borrowers’ loans -0.2 -0.2 -0.2 -0.3 -0.4 -0.4 -0.5 -0.6 -0.6 -0.6 -3.9

Graduate borrowers’ loans -0.2 -0.4 -0.5 -0.6 -0.8 -0.9 -1.1 -1.3 -1.4 -1.5 -8.8

Exclude AGI under 175 percent of the federal poverty 

guideline

Undergraduate borrowers’ loans 0.2 0.2 0.3 0.4 0.4 0.5 0.5 0.6 0.7 0.7 4.4

Graduate borrowers’ loans 0.3 0.5 0.7 0.9 1.1 1.3 1.6 1.8 2.0 2.1 12.3

Adjust the Timing of Loan Forgiveness

Delay by five years

Undergraduate borrowers’ loans -0.2 -0.2 -0.2 -0.3 -0.3 -0.3 -0.4 -0.4 -0.4 -0.4 -3.0

Graduate borrowers’ loans -0.4 -0.6 -0.8 -1.0 -1.2 -1.5 -1.8 -2.1 -2.3 -2.4 -14.1

Accelerate by five years

Undergraduate borrowers’ loans 0.3 0.3 0.4 0.5 0.6 0.7 0.7 0.8 0.8 0.8 6.0

Graduate borrowers’ loans 0.6 1.0 1.3 1.7 2.1 2.4 2.9 3.3 3.7 3.8 22.7

Source: Congressional Budget Office.

All options would take effect for new borrowers on or after July 1, 2020. 

By law, the costs of federal student loans are measured using procedures prescribed in the Federal Credit Reform Act of 1990. Subsidy costs do not 

include the administrative costs of disbursing and servicing loans.

AGI = adjusted gross income; REPAYE = Revised Pay as You Earn.

a. Measured in relation to CBO’s August 2019 baseline budget projections.

b. Measured in relation to projected costs under the first option, “Make REPAYE the Only Income-Driven Repayment Plan.” 
30 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

Table 4-2.

Change in the Subsidy Rate for Student Loans Under Options That Would Change 

Income-Driven Repayment, 2020 to 2029

Percentage Points

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Average, 

2020–

2029

Options That Would Change the Availability of Income-Driven Repayment Plansa

Make REPAYE the Only Income-Driven Repayment 

Plan

Undergraduate borrowers’ loans -0.4 -0.5 -0.6 -0.7 -0.8 -0.9 -1.0 -1.1 -1.2 -1.1 -0.8

Graduate borrowers’ loans -0.8 -1.5 -1.9 -2.4 -3.0 -3.6 -4.2 -4.8 -5.3 -5.3 -3.5

Make REPAYE the Only Repayment Plan

Undergraduate borrowers’ loans 0.8 1.1 1.7 2.2 2.7 3.3 3.6 4.2 4.6 4.8 3.0

Graduate borrowers’ loans 0.7 1.4 1.9 2.5 3.2 3.6 4.3 4.5 4.7 4.9 3.3

Eliminate All Income-Driven Repayment Plans

Undergraduate borrowers’ loans -2.1 -2.5 -3.2 -3.8 -4.5 -5.1 -5.7 -6.3 -6.5 -6.3 -4.8

Graduate borrowers’ loans -5.2 -9.4 -11.7 -14.3 -17.1 -19.6 -22.6 -24.7 -26.6 -27.3 -18.7

Options That Would Change How Borrowers’ Payments Are Calculatedb

Adjust the Share of Discretionary Income Used to 

Calculate Monthly Payments

Increase to 12 percent

Undergraduate borrowers’ loans -0.4 -0.4 -0.5 -0.6 -0.8 -0.8 -0.9 -1.0 -1.0 -0.9 -0.7

Graduate borrowers’ loans -0.8 -1.4 -1.8 -2.2 -2.7 -3.0 -3.5 -3.8 -4.0 -4.1 -2.9

Decrease to 8 percent

Undergraduate borrowers’ loans 0.5 0.6 0.8 0.9 1.1 1.2 1.3 1.4 1.4 1.3 1.1

Graduate borrowers’ loans 1.2 2.0 2.4 3.0 3.6 4.2 4.8 5.3 5.5 5.5 3.9

Adjust the Definition of Discretionary Income

Exclude AGI under 125 percent of the federal 

poverty guideline

Undergraduate borrowers’ loans -0.4 -0.4 -0.5 -0.6 -0.7 -0.8 -0.9 -1.0 -1.0 -1.0 -0.7

Graduate borrowers’ loans -0.5 -0.9 -1.1 -1.3 -1.6 -1.8 -2.0 -2.2 -2.4 -2.4 -1.7

Exclude AGI under 175 percent of the federal 

poverty guideline

Undergraduate borrowers’ loans 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.1 1.1 0.8

Graduate borrowers’ loans 0.7 1.2 1.5 1.8 2.2 2.5 2.9 3.1 3.3 3.3 2.3

Adjust the Timing of Loan Forgiveness

Delay by five years

Undergraduate borrowers’ loans -0.3 -0.4 -0.4 -0.5 -0.6 -0.6 -0.7 -0.7 -0.7 -0.7 -0.6

Graduate borrowers’ loans -0.9 -1.4 -1.7 -2.1 -2.4 -2.9 -3.2 -3.6 -3.8 -3.8 -2.7

Accelerate by five years

Undergraduate borrowers’ loans 0.7 0.7 0.8 1.0 1.1 1.2 1.3 1.4 1.4 1.3 1.1

Graduate borrowers’ loans 1.5 2.3 2.8 3.4 4.0 4.6 5.1 5.7 6.1 6.0 4.3

Source: Congressional Budget Office.

All options would take effect for new borrowers on or after July 1, 2020. 

A subsidy rate reflects the government’s cost for a loan in cents per dollar disbursed. By law, the costs of federal student loans are measured using 

procedures prescribed in the Federal Credit Reform Act of 1990. Subsidy costs do not include the administrative costs of disbursing and servicing 

loans.

AGI = adjusted gross income; REPAYE = Revised Pay as You Earn.

a. Measured in relation to CBO’s August 2019 baseline budget projections.

b. Measured in relation to projected costs under the first option, “Make REPAYE the Only Income-Driven Repayment Plan.”
CHAPTER 4 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 31

4.8 and 4.9 percentage points higher, respectively (see 

Table 4-2). 

Subsidy costs would rise under this option because 

some borrowers who otherwise would have enrolled in 

fixed-payment plans would repay their loans more slowly 

in the REPAYE plan and could have some of their debt 

forgiven. In CBO’s assessment, however, borrowers who 

enroll in fixed-payment plans under current law borrow 

less and earn more, on average, than those in incomedriven plans. For that reason, CBO expects that they 

would be more likely to fully repay their loans in the 

REPAYE plan, which would limit the overall increase in 

subsidy costs. To simplify the analysis, CBO modeled 

borrowers as always recertifying their income and making their required payments (rather than optional, larger 

payments).

Instead of eliminating the other payment plans, policymakers might prefer to make the REPAYE plan the 

default plan, like the standard fixed-payment plan under 

current law. In that case, borrowers would automatically 

be enrolled in the REPAYE plan when their repayment 

period began unless they selected an alternative. In 

CBO’s assessment, that policy would have a greater cost 

to the government than this option because it would 

allow borrowers to select the plan with the most favorable terms—and thus the largest subsidy—based on their 

expected earnings.

Eliminate All Income-Driven Repayment Plans

Under this option, income-driven repayment plans 

would no longer be available for borrowers who took out 

their first loan on or after July 1, 2020. CBO analyzed 

this option to provide an estimate of the total cost of 

income-driven repayment plans, which would be equal 

to the savings that would come from eliminating them. 

The estimated costs of this option are very uncertain 

because the policy is a significant departure from current law. One source of uncertainty is the extent of 

the decline in borrowing: Some borrowers might not 

take out loans or even attend college in the absence of 

income-driven plans. 

In CBO’s estimation, eliminating income-driven plans 

would reduce the subsidy cost of student loans over the 

2020–2029 period by $122.0 billion—$25.1 billion for 

loans to undergraduate students and $96.9 billion for 

loans to graduate students (see Table 4-1 on page 29). 

(The latter estimate incorporates a small decline 

in borrowing by graduate students over the 2020–

2029 period. Because their loans would have a negative 

average subsidy rate, that decline in borrowing reduces 

the government’s net gain from the policy.) In 2029, 

when the policy would apply to almost all new loans, 

average subsidy rates would be 6.3 percentage points 

lower for loans to undergraduate students and 27.3 percentage points lower for loans to graduate students (see 

Table 4-2). 

Subsidy costs would fall because eliminating incomedriven plans would end debt forgiveness. CBO also 

expects that many borrowers who otherwise would have 

enrolled in such plans would select fixed-payment plans 

with extended terms to lower their required payments. 

Those borrowers would accrue and pay more interest 

than borrowers in 10-year plans, further reducing the 

subsidy cost for their loans. However, because borrowers 

who currently enroll in income-driven plans tend to borrow more and earn less than borrowers in fixed-payment 

plans, CBO expected that they would be more likely to 

default on their loans in a fixed-payment plan, which 

would partly offset the reduction in costs. 

Options That Would Change How Borrowers’ 

Payments Are Calculated 

CBO examined three options that would change borrowers’ required payments by changing the share of 

discretionary income used to calculate those payments, 

changing the definition of discretionary income, or 

changing the timing of loan forgiveness. Each of the 

policies would apply to borrowers who took out their 

first loan on or after July 1, 2020. Over time, as more of 

those borrowers began repaying their loans, the effects of 

each policy would increase.

To simplify the analysis and align the options with 

recently proposed policies, CBO considered the REPAYE 

plan to be the only income-driven plan available under 

all three options. Therefore, each option’s budgetary 

effects are measured in relation to costs under the first 

option from the previous set. The costs are presented 

that way to isolate the effects of changing borrowers’ 

payments from the effects of making the REPAYE plan 

the only income-driven plan. (In a cost estimate, CBO 

would measure the effects of the policies against its 

baseline budget projections.)6 For each option, CBO 

6. Such estimates are available as supplemental material 

accompanying this report.
32 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

examined the effects of equal but opposite changes to 

one parameter of the REPAYE plan. 

Adjust the Share of Discretionary Income Used to 

Calculate Monthly Payments 

Under the REPAYE plan, borrowers’ required monthly 

payments are 10 percent of their discretionary income. 

Recently proposed policies would alter that share.7 CBO 

analyzed the effects of either increasing or decreasing the 

share by 2 percentage points, so that payments would 

equal 12 percent or 8 percent of borrowers’ discretionary 

income. In each case, the policy would apply to borrowers who took out their first loan on or after July 1, 

2020, and the REPAYE plan would be the only available 

income-driven plan for those borrowers. Unlike other 

income-driven plans, the REPAYE plan does not cap 

payments at the amount a borrower would pay under a 

10-year fixed-payment plan. Therefore, payments would 

change for all borrowers with discretionary income—

including those with high levels of income. 

If required payments were 12 percent of borrowers’ discretionary income, the subsidy cost of loans in incomedriven plans over the 2020–2029 period would fall by 

$19.0 billion—$4.0 billion for loans to undergraduate 

students and $15.1 billion for loans to graduate students, 

in CBO’s estimation (see Table 4-1 on page 29). In 

2029, when the policy would apply to almost all new 

loans, average subsidy rates would be 0.9 percentage 

points lower for undergraduate borrowers’ loans and 

4.1 percentage points lower for graduate borrowers’ loans 

(see Table 4-2 on page 30). 

By contrast, if required payments were 8 percent of 

borrowers’ discretionary income, the subsidy cost of 

loans in income-driven plans would rise by $26.4 billion—$5.8 billion for loans to undergraduate students 

and $20.7 billion for loans to graduate students. In 

2029, when the policy would apply to almost all new 

loans, average subsidy rates would be 1.3 percentage 

points higher for loans to undergraduate students and 

5.5 percentage points higher for loans to graduate 

students. 

7. The President’s budget for fiscal year 2020 proposed increasing 

the share to 12.5 percent, and the PROSPER Act would 

have increased it to 15 percent. CBO analyzed the effects of 

increasing the share to 15 percent in Options for Reducing the 

Deficit: 2019 to 2028 (December 2018), p. 28, www.cbo.gov/

publication/54667. That analysis differs from the analysis here 

because it was based on the PAYE plan.

Increasing the share of discretionary income used to 

calculate borrowers’ payments would have smaller effects, 

in absolute terms, than decreasing that share. That is 

because increasing borrowers’ payments would cause 

some of them to pay off their balances sooner, which 

means they would pay less interest on their loans.

Adjust the Definition of Discretionary Income 

In income-driven repayment plans, borrowers’ payments are a percentage of their discretionary income. 

Discretionary income, which is meant to reflect income 

after essential expenses (such as housing, food, and 

taxes), is typically defined as adjusted gross income above 

150 percent of the federal poverty guideline for a borrower’s household. Policymakers have considered altering 

that definition in recent years.8

CBO analyzed the effects of defining discretionary 

income as AGI over 125 percent of the federal poverty 

guideline or AGI over 175 percent of the federal poverty guideline. In each case, the policy would apply to 

borrowers who took out their first loan on or after July 1, 

2020, and the REPAYE plan would be the only available 

income-driven plan for those borrowers. 

To understand how the policies would change borrowers’ payments, imagine that the federal poverty 

guideline in a given year is $20,000 for a hypothetical 

borrower with an AGI of $40,000. Under the REPAYE 

plan, that borrower would have $30,000 (150 percent 

of $20,000) for essential expenses, $10,000 in discretionary income, and $1,000 in loan payments. If the 

share of AGI excluded from discretionary income fell to 

125 percent of the federal poverty guideline, the borrower would have $25,000 (125 percent of $20,000) for 

essential expenses, $15,000 in discretionary income, and 

$1,500 in payments. If the share rose to 175 percent of 

the federal poverty guideline, the borrower would have 

$35,000 (175 percent of $20,000) for essential expenses, 

$5,000 in discretionary income, and $500 in payments.

In CBO’s estimation, defining discretionary 

income as AGI over 125 percent of the federal poverty guideline would decrease the subsidy cost of 

8. For example, the Aim Higher Act (H.R. 6543, 115th Congress) 

and the College Affordability Act (H.R. 4674, 116th Congress) 

defined discretionary income as AGI over 250 percent of the 

federal poverty guideline for lower-income households and 

gradually decreased that amount to zero as borrowers’ earnings 

increased.
CHAPTER 4 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 33

student loans issued over the 2020–2029 period by 

$12.7 billion—$3.9 billion for loans to undergraduate 

students and $8.8 billion for loans to graduate students 

(see Table 4-1 on page 29). In 2029, when the policy 

would apply to almost all new loans, the average subsidy rate for undergraduate borrowers’ loans would be 

1.0 percentage point lower, and the average subsidy rate 

for graduate borrowers’ loans would be 2.4 percentage 

points lower (see Table 4-2 on page 30).

By contrast, CBO estimates that defining discretionary 

income as AGI over 175 percent of the federal poverty 

guideline would increase the subsidy cost of those loans 

by $16.7 billion—$4.4 billion for loans to undergraduate students and $12.3 billion for loans to graduate students. In 2029, when the policy would apply to almost 

all new loans, the average subsidy rate for undergraduate 

borrowers’ loans would be 1.1 percentage points higher, 

and the average subsidy rate for graduate borrowers’ 

loans would be 3.3 percentage points higher. 

The savings from decreasing the amount of borrowers’ income that was considered discretionary would 

be slightly smaller, in absolute terms, than the costs of 

increasing that share. That is because increasing borrowers’ required payments would cause some borrowers to 

pay off their balances sooner, which means they would 

pay less interest on their loans.

Adjust the Timing of Loan Forgiveness

The different income-driven repayment plans vary how 

long borrowers must make payments before their loans 

are forgiven. Both the income-contingent repayment 

plan and the original income-based repayment plan 

require borrowers to make payments for 25 years before 

receiving loan forgiveness. That time was reduced to 

20 years in the PAYE and updated IBR plans. The most 

recently introduced plan, the REPAYE plan, has different repayment terms for undergraduate and graduate borrowers—20 years and 25 years, respectively. 

Policymakers have considered adjusting the timing of 

loan forgiveness in other ways.9

CBO analyzed how the costs of student loans would 

change if loan forgiveness was delayed or accelerated by 

9. For example, the President’s budget for fiscal year 2020 

proposed adjusting the time to forgiveness to 15 years for 

new undergraduate borrowers and 30 years for new graduate 

borrowers.

five years. In each case, the policy would apply to borrowers who took out their first loans on or after July 1, 

2020, and the REPAYE plan would be the only available 

income-driven plan for those borrowers.

Delaying the forgiveness of student loans by five years 

would decrease their subsidy cost over the 2020–

2029 period by $17.2 billion—$3.0 billion for loans 

to undergraduate students and $14.1 billion for loans 

to graduate students (see Table 4-1 on page 29). 

Borrowers who took out loans only for undergraduate 

studies would have their loans forgiven after 25 years of 

repayment, and borrowers who took out loans for graduate studies would have their loans forgiven after 30 years. 

In 2029, when the policy would apply to almost all new 

loans, average subsidy rates would be 0.7 percentage 

points lower for undergraduate borrowers’ loans and 

3.8 percentage points lower for graduate borrowers’ loans 

(see Table 4-2 on page 30).

By contrast, CBO estimates that accelerating the forgiveness of student loans by five years would increase 

their subsidy cost over the 2020–2029 period by 

$28.7 billion—$6.0 billion for loans to undergraduate 

students and $22.7 billion for loans to graduate students. 

Borrowers who took out loans only for undergraduate 

studies would have their loans forgiven after 15 years of 

repayment, and borrowers who took out loans for graduate studies would have their loans forgiven after 20 years. 

In 2029, when the policy would apply to almost all new 

loans, average subsidy rates would be 1.3 percentage 

points higher for undergraduate borrowers’ loans and 

6.0 percentage points higher for graduate borrowers’ 

loans. 

The savings from delaying loan forgiveness would be 

smaller, in absolute terms, than the costs of accelerating 

it for two main reasons. First, payments that will occur 

after 25 or 30 years of repayment are worth less, when 

discounted to present values, than payments that will 

occur after 15 or 20 years.10 Second, increasing the time 

to forgiveness would cause some borrowers to fully repay 

their loan balance. Therefore, CBO expects that fewer 

payments would be made at the end of the repayment 

term if it was longer.

10. Following FCRA procedures, CBO discounted payments 

associated with loans using projected interest rates for Treasury 

securities in the years the loans would be disbursed.

A

Appendix A: Present-Value Calculations

To estimate the subsidy cost of a student loan, as defined 

by the Federal Credit Reform Act of 1990 (FCRA), 

the Congressional Budget Office discounts associated 

cash flows to their present value at the date the loan is 

disbursed. Expressing the cost of a loan as a present-value 

subsidy means it can be recorded in the budget in the 

year the loan is issued, which makes it easier to compare 

the budgetary effects of guaranteed and direct loans or 

loans and other forms of assistance, such as grants.

Subsidies are calculated by summing the present values 

of the government’s cash outflows and inflows. The loan 

disbursement is the main outflow, and the borrower’s 

payments are the main inflows. Under FCRA accounting, the outflows and inflows are discounted to present 

values using interest rates on Treasury securities from 

the year of the loan’s disbursement with maturities that 

match the timing of the cash flows. For example, the 

loan disbursement is not discounted, payments that 

are received in the following year are discounted at the 

1-year rate, and payments that are received 10 years after 

the disbursement are discounted at the 10-year rate. The 

rates are based on “zero-coupon” Treasury securities, 

which pay no interest, only a lump sum at maturity.1

Although they are not part of the subsidy calculation, 

this report includes estimates of forgiven balances discounted using FCRA procedures. Discounting makes 

it easier to compare forgiven balances, which may 

include large amounts of unpaid interest, with disbursed 

1. The rates for zero-coupon Treasury securities differ slightly from 

the rates of Treasury securities that pay semiannual interest, such 

as 10-year Treasury notes.

amounts. The discounted forgiven amount reveals how 

much lower the subsidy would be if borrowers fully paid 

off their debt in the year it was forgiven.

To illustrate those concepts, consider the case from 

Chapter 1 of a hypothetical borrower repaying a 

$50,000 loan through the Pay as You Earn plan (see 

Table A-1). The loan in that example has an interest rate 

of 6 percent, which would be consistent with the interest 

rate on an undergraduate Stafford loan issued when the 

10-year Treasury note rate was approximately 4 percent. 

(Undergraduate Stafford loans for a given academic year 

have an interest rate 2.05 percentage points higher than 

the high yield of the 10-year Treasury note from the 

last auction before the previous June.) To simplify the 

analysis, CBO used a single discount rate of 4 percent. 

The loan’s subsidy is equal to the present value of the 

disbursement (column A in Table A-1) minus the present 

value of the payments (column E): $9,862. The subsidy 

rate is the subsidy divided by the disbursement: 19.7 percent. (Subsidy rates indicate a loan’s cost to the government in cents per dollar disbursed, which allows for 

easier comparisons of loan programs of different sizes.) 

In the 20th year of repayment, the borrower receives 

forgiveness for an unpaid balance of $47,999 (column 

D), which has a present value of $21,906 (column F). 

As a percentage of the disbursement, the present value of 

the forgiven amount is 44 percent.
36 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

Table A-1.

Discounted Payments and Forgiven Balance for a Hypothetical Borrower

Dollars

Year Disbursement Balance Payments Forgiven Amount

Discounted 

Payments

Discounted 

Forgiven Amount

A B C D E F

0 50,000 50,000

1 50,874 2,127 2,045

2 51,664 2,209 2,042

3 52,370 2,294 2,040

4 52,987 2,383 2,037

5 53,513 2,474 2,034

6 53,945 2,569 2,030

7 54,278 2,666 2,026

8 54,511 2,767 2,022

9 54,639 2,872 2,018

10 54,659 2,980 2,013

11 54,567 3,092 2,008

12 54,359 3,207 2,003

13 54,032 3,327 1,998

14 53,582 3,451 1,993

15 53,004 3,578 1,987

16 52,293 3,710 1,981

17 51,446 3,847 1,975

18 50,458 3,988 1,969

19 49,324 4,134 1,962

20 47,999 4,285 47,999 1,955 21,906

Total 50,000 n.a. 61,960 47,999 40,138 21,906

Source: Congressional Budget Office.

In CBO’s calculation, the borrower begins repaying the loan with an income of $40,000, which increases annually by 3 percent. The loans have an 

interest rate of 6 percent. 

The borrower in this example makes payments under the Pay as You Earn plan.

The discount rate is 4 percent.

CBO discounted payments and the forgiven balance by dividing their value by 1.04t, where t is the number of years after the loan’s disbursement.

n.a. = not applicable.
B

Appendix B: CBO’s Approach to Estimating the 

Cash Flows of Loans in Income-Driven Repayment Plans

Cash flows in income-driven repayment plans depend 

on borrowers’ household income and household size. 

Therefore, to project the costs of income-driven plans, 

the Congressional Budget Office projected household 

income and size for borrowers who would enroll in those 

plans. CBO’s analysis also accounted for the fact that 

different types of borrowers might choose income-driven 

and fixed-payment plans. In particular, the borrowers 

who choose income-driven plans might be more likely to 

benefit more from particular features of those plans, such 

as loan forgiveness. 

CBO projected the characteristics of such borrowers 

and, in turn, their household income over the course of 

repayment. Most income-driven plans define household 

income as the borrower’s income, plus his or her spouse’s 

income if the borrower is married and files taxes jointly. 

In the Revised Pay as You Earn (REPAYE) plan, spouses’ 

income is included even for married borrowers who file 

taxes separately.1

The model used for the analysis shares features and 

methods with other models CBO has developed to make 

long-term projections of the federal budget and the economy.2

 It projects earnings and payments of individual 

1. For the purposes of the analysis, CBO equated adjusted gross 

income, which is used to calculate required payments in incomedriven plans, with earnings. Using data from the Survey of 

Consumer Finances, CBO estimated that earnings from wages 

and salaries are the predominant source of household income 

for people between the ages of 21 and 54 with at least some 

college education—a population that resembles the population 

of student borrowers. On average, earnings comprise more than 

86 percent of income for households headed by someone with 

a college degree and about 80 percent of income for households 

headed by someone with some college education. 

2. The method CBO used to model borrowers’ earnings over time 

is consistent with the method used to simulate earnings for 

individuals and households in the Congressional Budget Office 

Long-Term Model, known as CBOLT. See Congressional Budget 

Office, An Overview of CBOLT: The Congressional Budget Office 

Long-Term Model (April 2018), www.cbo.gov/publication/53667. 

borrowers and households, calculates cash flows on the 

basis of those earnings, and then sums the cash flows for 

the set of borrowers in income-driven plans. The methods differ from those used in the other models (which 

are typically used to make long-term projections for the 

whole population) because people repaying student loans 

in income-driven plans differ, on average, from members 

of the overall population.

This appendix focuses on the two main components of 

CBO’s model: the underlying data and the four-step 

method CBO used to project the lifetime cash flows 

of loans disbursed between 2020 and 2029 and repaid 

through income-driven plans. 

Data Sources 

CBO’s main source for historical information on borrowers’ loan balances and repayment plans was the National 

Student Loan Data System (NSLDS)—the Department 

of Education’s central database for administering the federal student loan program. The NSLDS contains detailed 

information on student-loan borrowers compiled by 

schools and loan servicers, which are required to report 

new information within 30 to 120 days. That information includes borrowers’ sex, age, school of attendance, 

loan disbursements, educational attainment, repayment 

plan, and payment history. CBO analyzed longitudinal 

data for a random 4 percent sample from that data set, 

so the data tracked the same borrowers over time. CBO 

used the borrowers’ information to project the demographic characteristics of future borrowers.

To project the income of borrowers in income-driven 

repayment plans, CBO used a number of statistical 

models. The agency supplemented the data from the 

NSLDS with data from several other sources to model 

the following variables:

A working paper with more details on the model will follow the 

release of this report.
38 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

• The Current Population Survey (CPS) for 

relationships between borrowers’ demographic 

characteristics and their earnings, family size, and 

spouses’ characteristics; 

• The Survey of Income and Program Participation 

(SIPP) for borrowers’ marital status; 

• The Survey of Consumer Finances (SCF) for the 

student debt of borrowers’ spouses; and 

• Records from the NSLDS matched with imputed 

information on borrowers’ tax returns for the 

relationship between type of repayment plan and 

earnings.3

How CBO Projected the Characteristics of 

Borrowers in Income-Driven Repayment 

Plans Over Time

CBO used information on past borrowers from the 

NSLDS to project the characteristics of future borrowers 

in income-driven repayment plans at the time they began 

repaying their loans. To model the choice of an incomedriven repayment plan for borrowers taking out loans 

between 2020 and 2029, CBO used information on 

recent borrowers’ enrollment in income-driven repayment plans and modeled the choice of a plan as a function of borrowers’ characteristics, including their loan 

balance. CBO then used information from other data 

sources to project how the demographic characteristics of 

borrowers in those plans would change over time.

Modeling Which Borrowers Would Choose 

Income-Driven Repayment Plans

CBO projected borrowers’ selection of a given plan 

with a statistical model based on data from the NSLDS. 

Those data provide information on borrowers who 

recently began repaying their loans and whose choice of 

3. The Department of Education provided CBO with information 

on a sample of borrowers from the NSLDS and their imputed 

tax-return information through 2013. The imputed information 

was based on imputations of borrowers’ income provided by 

the Department of the Treasury. CBO did not use the data to 

directly project borrowers’ earnings over time; instead, the agency 

used the data to model the relationship between borrowers’ 

income and income-driven repayment. For a more detailed 

discussion of the Treasury data, see Appendix III in Government 

Accountability Office, Federal Student Loans: Education Needs 

to Improve Its Income-Driven Repayment Plan Budget Estimates, 

GAO-17-22 (November 30, 2016), www.gao.gov/products/

GAO-17-22.

repayment plan can be observed for several years after 

their graduation. The model relates the choice of a plan 

to the following characteristics of borrowers: sex, age, the 

total amount borrowed, educational attainment, the type 

of school attended (for example, a two-year, four-year, 

or for-profit school), and the selectivity of that school.4

CBO estimated that, on average, 33 percent of undergraduate borrowers and 49 percent of graduate borrowers 

would select an income-driven plan to repay loans issued 

between 2020 and 2029. Those borrowers were estimated to account for 37 percent of the volume of loans 

disbursed to undergraduate students and 56 percent of 

the volume of loans disbursed to graduate students.

When borrowers begin repaying their loans, the 

model assigns probabilities to their enrollment in a 

fixed-payment plan or one of three alternatives: the 

income-based repayment (IBR) plan for new borrowers 

before July 1, 2014; the Pay as You Earn (PAYE) plan or 

the IBR plan for new borrowers on or after July 1, 2014; 

or the REPAYE plan. (Borrowers in the updated IBR 

plan were grouped with those in the PAYE plan because 

those plans have very similar terms.) CBO used the estimated probabilities to randomly assign borrowers with 

certain characteristics to plans; to simplify the analysis, 

CBO modeled borrowers as remaining in the same plan 

until their loan balance is repaid or forgiven. 

CBO projected enrollment in income-driven plans using 

a statistical model based on the behavior of borrowers who entered repayment between 2013 and 2015. 

That model suggested that most borrowers who would 

receive loans over the 2020–2029 period and enroll 

in an income-driven plan would choose the PAYE or 

updated IBR plan (see Table B-1). Over the same period, 

enrollment in the original IBR plan would gradually fall: 

By 2029, only 2 percent of borrowers enrolling in an 

income-driven plan would select it. That decline occurs 

because, over time, fewer borrowers entering repayment 

will qualify for that plan (that is, fewer will have begun 

borrowing before July 1, 2014). CBO expected that no 

student borrower who began repaying loans in the future 

would select the income-contingent repayment (ICR) 

4. CBO used data from the 2008 Barron’s Admissions 

Competitiveness Index, provided by the National Center for 

Education Statistics, to categorize schools by their level of 

selectivity.
APPENDIXB Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 39

plan, so loans repaid through that plan were excluded 

from the analysis.5

CBO also projected that over the next 10 years, the 

share of newly disbursed loans repaid through the Public 

Service Loan Forgiveness (PSLF) program would remain 

relatively constant, at a higher level than past rates of 

take-up indicate. Those estimates are highly uncertain, 

however, because the program is still relatively new: The 

earliest date at which borrowers could receive forgiveness 

through the PSLF program was October 1, 2017, and 

very few participating borrowers had received forgiveness 

as of September 30, 2019. On the basis of estimates of 

the eligible population and growth in the submission of 

employment certification forms for the PSLF program, 

CBO expects the share of borrowers receiving forgiveness 

through the program in the 2030s (for loans disbursed 

over the 2020–2029 period) to be considerably larger. 

Using data on past borrowers, CBO estimated that graduate and undergraduate borrowers who had larger loan 

balances would be more likely to enroll in income-driven 

repayment plans, for two main reasons. First, such borrowers typically have smaller required monthly payments 

under such plans than they would under the standard 

fixed-payment plan. Second, conditional on being in an 

5. Only a small fraction of recent borrowers use the ICR plan. CBO 

expects that borrowers would generally select the plan only if it 

was the sole income-driven plan for which they were eligible, as 

is the case for borrowers with a consolidation loan that includes a 

parent’s PLUS loan. All other borrowers would benefit more from 

the IBR, PAYE, or REPAYE plans.

income-driven plan, borrowers with larger loan balances 

are less likely to fully repay their loan by the end of the 

repayment period, which means they are more likely to 

receive loan forgiveness. 

For similar reasons, borrowers with higher expected 

earnings would be less likely to enroll in incomedriven plans. Because direct information on borrowers’ 

postgraduation earnings or expected earnings was not 

available, CBO relied on imputations from the NSLDSmatched data on tax returns and estimated that enrollment in income-driven plans is inversely correlated with 

borrowers’ postgraduation earnings. CBO took that 

estimated relationship into account when projecting the 

earnings of future borrowers.6 Specifically, borrowers 

in income-driven repayment plans were projected to 

have lower lifetime income, on average, than borrowers 

in fixed-payment plans.7 Overall, that meant that the 

projected rate of enrollment in income-driven repayment 

plans was higher for borrowers with large balances and 

low earnings than for borrowers with small balances or 

high earnings. 

CBO’s modeling choices were guided by the available data. Because there were no data directly linking 

6. The estimated relationship also accounted for characteristics of 

borrowers including their age, sex, educational attainment, type 

of school attended, and selectivity of that school. 

7. Although the estimated relationship between lifetime income 

and enrollment in an income-driven plan was based on data with 

imputations, those findings were confirmed with data from the 

Survey of Consumer Finances.

Table B-1.

Projected Distribution Among Income-Driven Repayment Plans of the Volume of Loans 

Issued From 2020 to 2029

Percent

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

IBRa 19 15 12 9 7 6 5 4 3 2

PAYEb 65 69 72 75 77 78 80 80 81 82

REPAYE 17 16 16 16 16 16 16 16 16 16

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System. 

IBR = income-based repayment; PAYE = Pay as You Earn; REPAYE = Revised Pay as You Earn.

a. Loans in this category are those repaid through the original income-based repayment plan, which covers borrowers who took out loans before 

July 1, 2014.

b. This category combines loans repaid through the PAYE plan with those repaid through the updated income-based repayment plan, which covers 

borrowers who first took out loans on or after July 1, 2014, and has very similar terms.
40 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

borrowers’ repayment history to their postgraduation 

earnings at the time CBO conducted its analysis, the 

agency instead used statistical imputations when modeling the relationship between enrollment in incomedriven repayment plans and borrowers’ earnings.8

Modeling Changes in Borrowers’ Demographic 

Characteristics Over Time

CBO modeled changes in demographic characteristics 

in several steps. First, CBO used historical data from the 

NSLDS to project the characteristics of future borrowers 

at the time they began repaying their loans, preserving 

the statistical relationships between characteristics (such 

as sex, age, academic level, and loan balance) observed in 

the group of borrowers who began repaying their loans 

in 2016. 

Second, CBO used data from multiple sources to model 

year-to-year changes in demographic outcomes for each 

borrower in the sample over the duration of loan repayment. To model household size, CBO projected demographic changes in marital status and the number of 

dependent children for each borrower’s household over 

time. CBO modeled each borrower’s marriage outcomes 

as conditional on his or her sex, age, education, previous 

marital status, and year of birth, using data from the 

SIPP.9 The number of dependent children in a borrower’s 

household was modeled to match patterns in the CPS 

data based on individuals’ sex, age, and education.

Third, to simulate household earnings, which include 

spouses’ earnings for borrowers who are married, CBO 

simulated the demographic characteristics of borrowers’ 

8. The FUTURE Act (Public Law 116-91), enacted in December 

2019, lets borrowers grant the Department of Education access 

to their tax records in order to determine their eligibility or 

recertify their income for income-driven plans. 

9. To project changes in borrowers’ marital status, CBO used the same 

analytic method used in CBOLT. For details, see Josh O’Harra 

and John Sabelhaus, Projecting Longitudinal Marriage Patterns for 

Long-Run Policy Analysis, Technical Paper 2002-2 (Congressional 

Budget Office, October 2002), www.cbo.gov/publication/14080. 

Further, to account for differences between the sample of student 

borrowers and the overall population represented in the SIPP 

data, CBO adjusted borrowers’ marriage rates for consistency 

with the marriage rates of student borrowers in the NSLDSmatched data on tax returns.

spouses using data from the CPS and accounted for the 

correlation between spouses’ educational attainment.10

How CBO Projected Borrowers’ Household 

Earnings Over Time 

After the characteristics of future borrowers and their 

spouses were projected, CBO used those characteristics to project year-to-year household earnings for each 

borrower in the sample. To account for variability in 

borrowers’ labor market experience over time, CBO 

separately modeled borrowers’ and their spouses’ labor 

force participation, full-time and part-time status, hours 

of work, hourly wage rates, and spells of unemployment 

on a yearly basis. Those labor market outcomes were 

projected to depend on characteristics of borrowers 

including sex, age, year of birth, marital status, number 

of children, and educational attainment.11 For years in 

which borrowers were married, their projected annual 

household earnings included their spouses’ earnings. 

Growth in borrowers’ earnings matched the growth in 

aggregate earnings projected in CBO’s long-term macroeconomic forecast. 

In addition, to reflect the inverse relationship between 

borrowers’ lifetime earnings and their enrollment in 

income-driven repayment plans, CBO modeled the 

average lifetime earnings of future borrowers in incomedriven plans as being lower than the average lifetime 

earnings of similar borrowers in fixed-payment plans.

To project the household earnings of borrowers in the 

PSLF program, CBO made one adjustment to the 

foregoing methods. Using data from the CPS on workers 

in private-versus public-sector jobs, CBO estimated that 

workers in the public and nonprofit sectors were more 

10. Because borrowers’ discretionary income could be affected by 

their spouses’ student loan repayment obligations, CBO also 

simulated spouses’ loan amounts, using information from the 

SCF on spouses’ likelihood of carrying a student loan and 

information from the NSLDS on the loan balances of individuals 

with the demographic characteristics of the spouses predicted to 

have loans. 

11. To project the earnings of borrowers and their spouses, 

CBO applied a method it initially developed for use in 

CBOLT. For details, see Jonathan A. Schwabish and Julie H. 

Topoleski, Modeling Individual Earnings in CBO’s Long-Term 

Microsimulation Model, Working Paper 2013-04 (Congressional 

Budget Office, June 2013), www.cbo.gov/publication/44306; and 

Congressional Budget Office, Projecting Labor Force Participation 

and Earnings in CBO’s Long-Term Microsimulation Model

(October 2006), www.cbo.gov/publication/18237.
APPENDIXB Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 41

likely to have earnings in the middle of the distribution 

than to have very high or very low earnings. CBO used 

that information, combined with recent information on 

the share of borrowers in the PSLF program, to probabilistically project which borrowers would be most likely to 

participate in the program.12

How CBO Projected Borrowers’ 

Required Payments 

Borrowers’ payments in income-driven plans are 

determined by the type of plan and the borrowers’ 

discretionary income. In most income-driven plans, 

discretionary income is defined as adjusted gross income 

above 150 percent of the federal poverty guideline for 

a borrower’s household. The federal poverty guidelines 

increase with the number of members in a borrower’s 

household and are updated annually to reflect changes in 

the consumer price index. Borrowers’ required monthly 

payments are either 10 or 15 percent of their discretionary earnings, depending on their payment plan. 

12. Recent reports have shown that approval rates for loan forgiveness 

in the PSLF program are lower than the potential eligibility rates, 

probably because borrowers (or loan servicers) are misinformed 

about the program; see Government Accountability Office, 

Public Service Loan Forgiveness: Education Needs to Provide Better 

Information for the Loan Servicer and Borrowers, GAO-18-547 

(September 27, 2018), www.gao.gov/products/GAO-18-547, and 

Public Service Loan Forgiveness: Improving the Temporary Expanded 

Process Could Help Reduce Borrower Confusion, GAO-19-595 

(September 5, 2019), www.gao.gov/products/GAO-19-595. 

Because CBO was focused on loans issued in 2020 or later, it 

estimated that a higher percentage of borrowers eligible for loan 

forgiveness would receive it as the misinformation was corrected 

over time.

How CBO Accounted for Irregular Payments

To project lifetime cash flows for loans repaid through 

income-driven plans, CBO needed to account for 

circumstances in which borrowers’ actual payments 

would differ from their required payments. The required 

payments alone indicate what the cash flows from loans 

would be if borrowers never defaulted, deferred their 

payments, or prepaid. By contrast, actual payments 

reflect outcomes such as default, recovery (through debt 

collection), deferment, forbearance, and prepayment. 

To incorporate those outcomes into the projected cash 

flows, CBO used historical data from the NSLDS to 

estimate statistical models relating those outcomes to 

borrowers’ characteristics, including their choice of 

repayment plan. CBO then used those estimates to 

project outcomes for future cohorts of borrowers (that 

is, groups categorized on the basis of the year they began 

repaying their loans). For cases in which borrowers were 

projected to default on loans, CBO used historical data 

to estimate their likelihood of recovery.

C

Appendix C: Projections for Different Types 

of Student Loans

Earlier in this report, the Congressional Budget Office 

provides projections for loans made to undergraduate 

and graduate borrowers (see Chapter 3). The tables in 

this appendix provide separate projections for the types 

of loans made to those borrowers—subsidized Stafford 

and unsubsidized Stafford loans for undergraduates, and 

unsubsidized Stafford and PLUS loans for graduates. 

Table C-1.

Average Subsidy Rates, by Type of Loan and Repayment Plan, 2020 to 2029

Percent

Income-Based Repaymenta PAYEb REPAYE

Loans to Undergraduate Borrowers

Subsidized Stafford loans 9.7 24.6 19.6

Unsubsidized Stafford loans 0.7 10.3 8.3

Loans to Graduate Borrowers

Unsubsidized Stafford loans -7.0 15.5 9.2

PLUS loans -4.3 31.0 20.9

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System.

A subsidy rate reflects the government’s cost for a loan in cents per dollar disbursed. By law, the costs of federal student loans are measured using 

procedures prescribed in the Federal Credit Reform Act of 1990. Subsidy costs do not include the administrative costs of disbursing and servicing 

loans.

CBO excluded one payment plan—the income-contingent repayment plan—from its estimates because the share of borrowers enrolled in that plan is 

very small.

PAYE = Pay as You Earn; REPAYE = Revised Pay as You Earn.

a. Loans in this category are those repaid through the original income-based repayment plan, which covers borrowers who took out loans before 

July 1, 2014.

b. This category combines loans repaid through the PAYE plan with those repaid through the updated income-based repayment plan, which covers 

borrowers who first took out loans on or after July 1, 2014, and has very similar terms.
44 Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options February 2020

Table C-2.

Volume and Subsidy Rates of Student Loans, by Type of Loan and Payment Plan 

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

2020–

2029a

Subsidized Stafford Loans

Fixed-Payment Plans

Volume (Billions of dollars) 13.8 14.3 14.8 15.3 16.0 16.6 17.3 18.0 18.8 19.7 164.6

Subsidy rate (Percent) 0 2.2 3.5 4.0 4.2 4.4 4.5 4.5 4.6 4.7 3.8

Income-Driven Plans

Volume (Billions of dollars) 8.2 8.3 8.5 8.7 8.9 9.1 9.3 9.4 9.5 9.7 89.7

Subsidy rate (Percent) 19.5 21.9 23.4 24.2 24.3 24.2 24.2 23.9 23.6 23.5 23.3

Total

Volume (Billions of dollars) 22.0 22.6 23.3 24.1 24.9 25.7 26.5 27.4 28.4 29.4 254.2

Subsidy rate (Percent) 7.3 9.5 10.8 11.3 11.4 11.4 11.3 11.2 11.0 10.9 10.7

Unsubsidized Stafford Loans to Undergraduate Borrowers

Fixed-Payment Plans

Volume (Billions of dollars) 14.1 14.5 15.1 15.7 16.4 17.1 17.8 18.7 19.6 20.6 169.5

Subsidy rate (Percent) -10.5 -8.6 -8.0 -7.9 -8.0 -7.9 -7.8 -7.8 -7.7 -7.7 -8.1

Income-Driven Plans

Volume (Billions of dollars) 9.3 9.5 9.7 10.0 10.3 10.5 10.8 11.0 11.3 11.5 103.8

Subsidy rate (Percent) 5.6 8.6 9.3 9.5 9.6 9.9 10.3 10.5 10.6 10.8 9.5

Total

Volume (Billions of dollars) 23.4 24.0 24.8 25.7 26.7 27.6 28.6 29.7 30.8 32.1 273.3

Subsidy rate (Percent) -4.1 -1.8 -1.2 -1.2 -1.2 -1.1 -1.0 -1.0 -1.0 -1.0 -1.4

Unsubsidized Stafford Loans to Graduate Borrowers

Fixed-Payment Plans

Volume (Billions of dollars) 14.0 14.7 15.4 16.2 16.9 17.8 18.6 19.5 20.5 21.6 175.3

Subsidy rate (Percent) -27.9 -25.7 -25.0 -24.8 -24.8 -24.6 -24.6 -24.6 -24.5 -24.4 -25.0

Income-Driven Plans

Volume (Billions of dollars) 16.5 17.1 17.8 18.4 19.0 19.6 20.3 21.1 21.9 22.6 194.2

Subsidy rate (Percent) 8.5 12.2 12.9 13.2 13.2 12.9 13.6 12.4 13.0 13.5 12.6

Total

Volume (Billions of dollars) 30.5 31.8 33.2 34.7 35.9 37.4 38.9 40.6 42.3 44.2 369.5

Subsidy rate (Percent) -8.2 -5.3 -4.7 -4.6 -4.7 -5.0 -4.7 -5.4 -5.2 -5.1 -5.2

PLUS Loans to Graduate Borrowers

Fixed-Payment Plans

Volume (Billions of dollars) 4.1 4.4 4.7 4.9 5.2 5.5 5.8 6.0 6.3 6.5 53.4

Subsidy rate (Percent) -43.3 -40.0 -38.9 -38.7 -38.7 -38.6 -38.6 -38.5 -38.4 -38.3 -39.1

Income-Driven Plans

Volume (Billions of dollars) 8.0 8.5 9.1 9.7 10.1 10.5 11.0 11.5 12.0 12.4 102.8

Subsidy rate (Percent) 21.8 26.8 28.2 27.2 27.5 27.0 27.6 26.4 26.7 27.9 26.8

Total

Volume (Billions of dollars) 12.1 12.9 13.8 14.6 15.3 16.0 16.8 17.5 18.2 18.9 156.2

Subsidy rate (Percent) -0.4 4.2 5.5 4.9 4.9 4.5 4.9 4.0 4.3 5.1 4.3

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System. 

Loans in income-driven plans include loans that receive forgiveness through the Public Service Loan Forgiveness program.

A subsidy rate reflects the government’s cost for a loan in cents per dollar disbursed. By law, the costs of federal student loans are measured using 

procedures prescribed in the Federal Credit Reform Act of 1990. Subsidy costs do not include the administrative costs of disbursing and servicing 

loans.

a. Values for the volume of loans are cumulative totals; values for subsidy rates are averages.
APPENDIX C Income-Driven Repayment Plans for Student Loans: Budgetary Costs and Policy Options 45

Table C-3.

Disbursed, Forgiven, and Repaid Amounts of Student Loans in Income-Driven Plans, by Type of Loan

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

2020–

2029a

Subsidized Stafford Loans

Disbursement (Billions of dollars) 8.2 8.3 8.5 8.7 8.9 9.1 9.3 9.4 9.5 9.7 89.7

Forgiven Balance (Billions of dollars) 1.7 1.6 1.5 1.6 1.6 1.6 1.6 1.6 1.6 1.6 16.0

Percentage of Disbursement Forgiven 20.9 19.6 18.2 17.8 17.7 17.6 17.5 17.0 16.6 16.7 17.9

Percentage of Disbursement Repaid 80.5 78.1 76.6 75.8 75.7 75.8 75.8 76.1 76.4 76.5 76.7

Unsubsidized Stafford Loans to Undergraduate Borrowers

Disbursement (Billions of dollars) 9.3 9.5 9.7 10.0 10.3 10.5 10.8 11.0 11.3 11.5 103.8

Forgiven Balance (Billions of dollars) 2.5 2.4 2.4 2.4 2.4 2.5 2.5 2.5 2.4 2.5 24.3

Percentage of Disbursement Forgiven 26.5 25.4 24.2 23.9 23.3 23.3 23.0 22.4 21.7 21.4 23.4

Percentage of Disbursement Repaid 94.4 91.4 90.7 90.5 90.4 90.1 89.7 89.5 89.4 89.2 90.5

Unsubsidized Stafford Loans to Graduate Borrowers

Disbursement (Billions of dollars) 16.5 17.1 17.8 18.4 19.0 19.6 20.3 21.1 21.9 22.6 194.2

Forgiven Balance (Billions of dollars) 9.0 8.8 8.7 9.0 9.2 9.2 9.6 9.6 10.0 10.4 93.4

Percentage of Disbursement Forgiven 54.6 51.5 49.0 48.8 48.2 47.0 47.0 45.7 45.6 46.0 48.1

Percentage of Disbursement Repaid 91.5 87.8 87.1 86.8 86.8 87.1 86.4 87.6 87.0 86.5 87.4

PLUS Loans to Graduate Borrowers

Disbursement (Billions of dollars) 8.0 8.5 9.1 9.7 10.1 10.5 11.0 11.5 12.0 12.4 102.8

Forgiven Balance (Billions of dollars) 6.5 6.6 6.7 6.8 7.1 7.2 7.5 8.0 8.3 9.0 73.6

Percentage of Disbursement Forgiven 81.3 77.3 72.9 70.3 70.9 68.0 68.4 69.4 69.0 72.8 71.6

Percentage of Disbursement Repaid 78.2 73.2 71.8 72.8 72.5 73.0 72.4 73.6 73.3 72.1 73.2

Source: Congressional Budget Office, using data from the Department of Education’s National Student Loan Data System. 

Forgiven amounts include balances forgiven through the Public Service Loan Forgiveness program. Forgiven balances and payments are discounted to 

present values in the year of a loan’s disbursement, using interest rates on Treasury securities. Forgiven balances and payments add up to more than 

100 percent because they include accrued interest.

a. Values for disbursements and forgiven balances are cumulative totals; values for the percentage of disbursements forgiven or repaid are averages.

List of Tables and Figures

Tables

1-1. Income-Driven Repayment Plans 8

3-1. Volume and Subsidy Rates of Loans, by Type of Repayment Plan, 2020 to 2029 22

3-2. Average Subsidy Rates, by Type of Loan and Repayment Plan, 2020 to 2029 23

3-3. Disbursed, Forgiven, and Paid Amounts of Loans Issued From 2020 to 

2029 and Repaid Through Income-Driven Plans 24

4-1. Change in the Subsidy Cost of Student Loans Under Options That Would 

Change Income-Driven Repayment, 2020 to 2029 29

4-2. Change in the Subsidy Rate for Student Loans Under Options That 

Would Change Income-Driven Repayment, 2020 to 2029 30

A-1. Discounted Payments and Forgiven Balance for a Hypothetical Borrower 36

B-1. Projected Distribution Among Income-Driven Repayment Plans of the 

Volume of Loans Issued From 2020 to 2029 39

C-1. Average Subsidy Rates, by Type of Loan and Repayment Plan, 2020 to 2029 43

C-2. Volume and Subsidy Rates of Student Loans, by Type of Loan and Payment Plan 44

C-3. Disbursed, Forgiven, and Repaid Amounts of Student Loans in 

Income-Driven Plans, by Type of Loan 45

Figures

1-1. Repayment Schedules for Two Hypothetical Borrowers, by Type of Repayment Plan 11

2-1. Borrowers With Direct Student Loans, by Type of Repayment Plan, 2010 to 2017 14

2-2. Direct Student Loans, by Type of Repayment Plan, 2010 to 2017 15

2-3. Distribution of Student Debt in Income-Driven Repayment Plans, 2010 to 2017 16

2-4. Percentage of the Disbursed Volume of Loans in Each Income-Driven 

Plan in 2017, by Borrowers’ First Year of Repayment 16

2-5. Percentage of Original Balance Remaining for Borrowers Who Began 

Repaying Loans in 2012, by Type of Repayment Plan 17

2-6. Cumulative Default Rates of Borrowers Who Began Repaying Loans in 

2012, by Type of Repayment Plan 17

3-1. Forgiveness of Loans Issued From 2020 to 2029, by Borrowers’ Projected 

Earnings and Original Balance 25

3-2. Distribution of Forgiven Student Debt Issued From 2020 to 2029, by 

Borrowers’ Projected Earnings and Original Balance 26
About This Document

This report was prepared at the request of the Chairman of the Senate Committee on the Budget 

and the Chairman of the Senate Committee on Health, Education, Labor, and Pensions. In 

keeping with the Congressional Budget Office’s mandate to provide objective, impartial analysis, 

the report makes no recommendations. 

Nadia Karamcheva, Jeffrey Perry, and Constantine Yannelis (a visiting scholar at CBO from the 

University of Chicago Booth School of Business) wrote the report with guidance from Sebastien 

Gay. Justin Humphrey produced the baseline budget estimates and estimates of the costs of policy 

options. David Burk, Tia Caldwell, Michael Falkenheim, Wendy Kiska, Xiaotong Niu, Delaney 

Smith, and Julie Topoleski also contributed to the analysis. Nabeel Alsalam, William Carrington, 

Gloria Chen, Sheila Dacey, Molly Dahl, Joseph Kile, Leah Koestner, Jason Levine (formerly of 

CBO), Shannon Mok, Damien Moore (formerly of CBO), Sam Papenfuss, and Chad Shirley 

provided useful comments, as did Brent Trigg of the Joint Committee on Taxation. 

Matthew Chingos of the Urban Institute, Jason Delisle of the American Enterprise Institute, 

Melissa Emrey-Arras of the Government Accountability Office, and Daniel Madzelan of the 

American Council on Education also provided helpful comments. The assistance of external 

reviewers implies no responsibility for the final product, which rests solely with CBO. 

Wendy Edelberg and Jeffrey Kling reviewed the report. Christine Browne was the editor, and 

Jorge Salazar was the graphics editor. An electronic version is available on CBO’s website 

(www.cbo.gov/publication/55968).

CBO continually seeks feedback to make its work as useful as possible. Please send any comments 

to communications@cbo.gov. 

Phillip L. Swagel

Director

February 2020