Education’s Direct Loan program provides financing to students and their parents to help students obtain postsecondary education. This program is currently the largest federal direct loan program with $912 billion in outstanding loans as of June 2016. Under this program, Education issues several types of student loans described in the following sidebar. William D. Ford Federal Direct Loan Types Subsidized Stafford Loans: Available only to undergraduate students with financial need (generally the difference between their cost of attendance and a measure of their ability to pay, known as expected family contribution). The interest rate as of July 1, 2016 is 3.76 percent. Borrowers are not responsible for paying interest on these loans while in school and during certain periods of deferment. Unsubsidized Stafford Loans: Available both to undergraduate and graduate school students irrespective of financial need. Interest rates as of July 1, 2016 are 3.76 percent for undergraduates and 5.31 percent for graduate school borrowers. Borrowers must pay all interest on these loans. PLUS Loans: Available to graduate student borrowers and parents of dependent undergraduates. The interest rate as of July 1, 2016, is 6.31 percent. Borrowers must pay all interest on these loans. Consolidation Loans: Available to student and parent borrowers wanting to combine multiple federal student loans (including those listed above) into one loan. Repayment periods are extended up to 30 years, thereby lowering monthly payments. Interest rates are equal to the weighted average of the underlying loans. Education offers a variety of repayment plans for Direct Loan borrowers: Standard, Graduated, Extended, and Income-Driven. Income-Driven Repayment (IDR) is an umbrella term that describes a number of repayment plans available to Direct Loan borrowers who meet specific eligibility requirements, as seen in figure 1. Unlike the Standard, Graduated, and Extended repayment plans, IDR plans offer loan forgiveness at the end of the repayment term. Additionally, their repayment terms are longer than under the Standard and Graduated plans, which are set at 10 years for non-consolidated loans. Borrowers in IDR plans generally have lower monthly payments compared to the Standard 10-year repayment plan. They may also pay less in the long term than they would under the Standard 10-year repayment plan due to the opportunity for eventual loan forgiveness. However, some borrowers may pay more. Borrowers in IDR plans can ultimately pay more in interest on their loans than they would under the Standard 10-year repayment plan due to longer repayment periods. Some borrowers will also fully repay their loans before their IDR plan repayment term ends and, therefore, not receive forgiveness. Additionally, under current tax law any amount forgiven under these plans is subject to federal income tax. In addition to making monthly payments more manageable (and eventually reducing the total amount owed for some borrowers receiving forgiveness), IDR plans may also reduce the risk of default. Borrowers who default on student loans face serious consequences, including damaged credit ratings and difficulty obtaining affordable credit in the future. In 2015, we reported that borrowers in two IDR plans had much lower default rates than borrowers in the Standard repayment plan. Specifically, among borrowers who entered repayment from fiscal year 2010 through fiscal year 2014, less than 1 percent of borrowers in the Income-Based Repayment and Pay As You Earn had defaulted on their loan, compared to 14 percent in the Standard repayment plan. To participate in an IDR plan, borrowers must provide documentation of their adjusted gross income (which we generally refer to as income in this report) to their loan servicer and certify their family size for an eligibility determination. Borrowers must recertify this information annually, which is used to update the borrower’s monthly payment amount. A borrower who fails to provide updated income information can remain in an IDR plan in order to qualify for future loan forgiveness, but their monthly payments will no longer be based on their income. Rather, payments will generally revert to the amount that would be owed under the Standard 10-year repayment plan until the borrower submits the required information. Borrowers who work in public service may lower their long-term loan costs by participating in the Public Service Loan Forgiveness (PSLF) program while repaying their loans through an IDR plan. Beginning in October 2017, borrowers eligible for PSLF can have their remaining Direct Loan balances forgiven after at least 10 years of payments in eligible repayment plans, generally an IDR plan or the Standard 10-year repayment plan. As we recently reported, PSLF may provide substantial savings over the life of the loan for qualifying borrowers in IDR plans compared to what they would pay without the PSLF benefit. In contrast, borrowers in the Standard 10-year repayment plan would pay their loans in full by the time they were eligible for forgiveness under PSLF. (See figure 2.) Participation in IDR plans has grown over time, as seen in figure 3. According to currently available quarterly data released by Education, the percent of outstanding Direct Loan dollars being repaid through IDR plans doubled from June 2013 to June 2016 to 40 percent. The percent of borrowers participating in IDR plans more than doubled over the same time period to 24 percent. However, as we previously reported, some borrowers who could benefit from IDR plans may still not be aware of them. As the variety of IDR options available to borrowers has expanded in recent years, there have been numerous reform proposals with a variety of goals ranging from simplifying IDR plans and better targeting their benefits to changing the tax treatment of IDR plan loan forgiveness. For instance, recent President’s budgets have proposed limiting the available IDR plan options for new borrowers to one revised IDR plan designed to better target benefits to the highest-need borrowers. A proposal has been introduced in the current Congress that would similarly make only one IDR plan available to new borrowers and target more generous benefits to those with lower incomes. Additional legislative proposals would automatically enroll all borrowers in a version of income-driven repayment and withhold payments from borrowers’ paychecks. Other proposed legislation would allow for automatic annual recertification of borrowers’ incomes and automatically place certain delinquent borrowers in an IDR plan. Another proposal would expand IDR plan eligibility to parents with Parent PLUS loans for dependent students. Legislation has also been introduced that would exempt student loan forgiveness under certain IDR plans from being taxed as income. As required by the Federal Credit Reform Act of 1990, Education estimates the long-term costs, known as subsidy costs, of the Direct Loan program annually for inclusion in the President’s budget. For Direct Loans, subsidy costs represent the estimated cost to the government of extending credit over the life of the loan, excluding administrative costs. (In this report, we generally refer to subsidy costs as “costs.”) Subsidy cost estimates are calculated based on the net present value of lifetime estimated cash flows to and from the government associated with these loans. For Direct Loans, cash flows from the government include loan disbursements to borrowers, while cash flows to the government include repayments of loan principal, interest and fee payments, and recoveries on defaulted loans. A positive subsidy cost estimate indicates that the government anticipates a net cost, while a negative subsidy cost estimate indicates that the government anticipates generating net subsidy income, not counting administrative costs. Education also annually reestimates the cost of loans made in each fiscal year, known as a loan cohort. Reestimates take into account actual loan performance as well as changes in assumptions about future performance, such as how many borrowers will default or how many will participate in different repayment plans. Reestimates may result in increases or decreases in subsidy cost estimates. No loan cohorts have been fully repaid, and estimates for all cohorts continue to be updated annually in the President’s budget. To estimate subsidy costs, Education has developed a student loan cash flow model (the student loan model) that incorporates a variety of assumptions about the future. These assumptions concern various aspects of loan performance, such as how many borrowers will prepay their loans, how many borrowers will default, and how successful default collection activities will be. Education uses a supplementary model to assist with the task of estimating repayment patterns for loans in IDR plans. (See appendix II for a description of how this supplementary model for estimating IDR plan repayment patterns works.) In the spring of 2015, Education initiated a redesign of its overall student loan model with technical support from Treasury and guidance from OMB in what is anticipated to be a multi-year project. Through our analysis of data underlying the President’s fiscal year 2017 budget, we found that Education estimates that Direct Loans in IDR plans will cost the government about $74 billion over their repayment term. More specifically, Education estimates that about $355 billion in loans will enter an IDR plan, and $281 billion will ultimately be paid by borrowers. As a result, Education expects a 21 percent subsidy rate, or an average cost to the government of $21 per every $100 in loans disbursed. See figure 4. All of the Direct Loan types eligible to participate in IDR plans contribute to the $74 billion Education estimates the government will incur in subsidy costs. Of these loan types, Consolidation loans are estimated to be the most costly, as seen in figure 5. Consolidation loans, which combine multiple existing federal student loans into one loan, are larger on average than other types of Direct Loans, and may have higher balances forgiven at the end of their repayment term.