The Ministry of Education announcement last week, a six-month extension of automatic forbearance to all borrowers enrolled in the “SAVE” income-driven repayment plan while it is challenged in court, adding that they will forgive any unpaid accrued interest during this period. We estimate that the Department of Education is forgoing approximately $500 million in reimbursements per month, meaning this extension would result in $3 billion in missed payments, bringing the total amount to 5 billion dollars. It’s important to note that a large portion of these payments will be paid later, so the net cost would be only a fraction of that $5 billion.

Approximately 8 million borrowers are currently enrolled in SAVE, and nearly half of these borrowers would have made payments without the announced forbearance. We estimate that this will result in a reduction of $500 million per month in repayments, most of which would go toward interest.

Due to the particularities of how the SAVE program is implemented, forbearance interest relief has an outsized effect on nonpayment compared to standard loan programs. In SAVE, monthly payments are calculated as a small percentage of the borrower’s monthly payment and any unpaid interest is waived at the end of each month. For those making $0 payments, this means all interest is waived. But for those who make payments, only unpaid interest after the borrower’s monthly payment would be waived. The monthly payments of many borrowers are below their monthly interest accrued, so even if they made some sort of nominal payment – ​​say, $100 that didn’t cover the entire monthly interest – their balance won’t increase or decrease. This means that their entire payments would have gone toward interest payments, leading to the outsized effect of the interest waiver in the latest forbearance program.

This latest development in the SAVE program pales in comparison to the $275 billion, ten-year cost of the program if fully implemented. Meanwhile, $500 million in payments are being lost each month as the scheme winds its way through the courts.