The Capitol building in Washington, D.C.

By now you’ve probably already heard that as of July 1, federal student loan interest rates will rise. But what you don’t know is that the increase can actually have a negative impact on taxpayers according to Forbes.

While some might think that higher interest rates would benefit taxpayers, that is not the case. Why? Simply put, the government runs on a deficit. While student loan interest rates go up, the government’s borrowing costs also rise, but net revenue for taxpayers does not.

Another key factor is the emergence of income-driven repayment (IDR) plans and its student loan forgiveness stipulation. An IDR allows eligible borrowers to make payments each year made up of 10 percent of their discretionary income, regardless of the balance of the loan or the interest rate. After a certain number of years of consistent payments, the remainder of the loan is forgiven.

In many cases, IDR plans cost the borrower more money over the life of a loan, and the discharge bill after 20 years is often close to, if not greater than, the original balance. Why exactly? An IDR plan protects borrowers from accruing interest with fixed payments, and while their payments remain flatly based on income, interest accrues on the loans and raises the balance. In some cases, as payments are made successfully, the overall balance could still rise. This only increases government expenses by the time student loan forgiveness is due. And with the new interest rates, this becomes more likely for individuals enrolled in IBR.

To put it in perspective, a borrower with $60,000 in graduate student loans at the new interest rates will pay about $79,000 over the course of 20 years under an IBR plan and receive around $54,000 in forgiveness. That $54,000 comes out of taxpayers’ paychecks.

It’s been estimated that high balance graduate student loans will cause most of the losses taxpayers will endure over the next 10 years. This news builds on old concerns at the end of 2016 when the Government Accountability Office released a report on the taxpayer expense of IDR plans after the first 10 years. Keep in mind, that this report pertained student loans entering student loan forgiveness plans in 2007. The qualms mentioned in this story pertain to the expected taxpayer expense ten years down the road. Judging by the issues presented in GAO report of the last ten years, one would hope the estimated cost to taxpayers will be accurate this time. Believe it or not, this wasn’t the only issue with student loan forgiveness.

I Want to Graduate With Debt

Unfortunately, the government can’t just “fix” this issue by decreasing interest rates since its borrowing costs will still remain the same. The government borrows based on interest rates set by the Federal Reserve for the private market. And while the Federal Reserve could lower interest rates in order to diminish borrowing costs, this would ultimately lead to inflation, and it would hurt the economy in other ways. Furthermore, since student loan interest rates are tied by law to the private market, so a fundamental change in the system requires political action in a grid-locked system.

So, what’s the solution? There are many. One could be for Congress to limit how much grad students can borrow. This would require a budget cut of some sort which normally generates opposition. One solution could be to transfer the federal graduate program over to the private market. While interest rates would remain tied to the market, competition among lenders could drive them slightly lower in theory; however, the greatest benefit would be the reduction in the bill for taxpayers.

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