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Federal Register / Vol. 86, No. 160 / Monday, August 23, 2021 / Rules and Regulations
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the existing opt-in process or the opt-out process established by these final regulations.
Net Budget Impacts We estimate that the IFR and these final regulations will have a net Federal budget impact over the 20222031 loan cohorts of $13.3 billion in outlays and a modification to past cohorts of $20.9
billion, for a total net impact of $34.1
billion. A cohort reflects all loans originated in a given fiscal year.
Consistent with the requirements of the Credit Reform Act of 1990, budget cost estimates for the student loan programs reflect the estimated net present value of all future non-administrative Federal costs associated with a cohort of loans.
The Net Budget Impact is compared to the 2022 Presidents Budget baseline PB2022 that includes the estimated effects of the student loan related provisions in the Coronavirus Aid, Relief, and Economic Security Act CARES Act and subsequent extensions.
As discussed throughout this preamble, the IFR and these final regulations changed the discharge process of loans for veterans with a service-related disability to an opt-out process instead of the opt-in process associated with the match between the Department and VA prior to the IFR.
While the match has been processed since 2018 and the Department has accepted VA determinations of disability status without additional medical information since 2013, a significant percentage of veterans who would qualify for the discharge did not submit applications. Of approximately 58,000 qualifying veterans identified in the match process since 2018, only about 22,000 veterans have received discharges, totaling approximately $650
million. According to Federal Student Aid, approximately 4,000 additional veterans are identified in each quarterly match. For the SSA match, approximately 21,000 additional borrowers are identified in each quarterly match. Since the start of the SSA match with the opt-in process in 2016, approximately $8.2 billion in TPD
discharges have been processed.
To estimate the effect of the opt-out procedure, the Department adjusted the disability component of its Death, Disability, and Bankruptcy assumption DDB, which also includes closed school and borrower defense discharges that have been the subject of recent regulations. To calculate the effect on past cohorts from borrowers currently eligible for the discharge, the Department summarized the balances, collections, and payments associated
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with veterans identified in the August 2018 match who had not received a disability or death discharge by the end of FY 2019. These potential claims were grouped by population identification non-consolidated, consolidated notfrom-default, and consolidated from default, and offset between the fiscal year of loan origination and fiscal year of disability. Baseline disability claims were also summarized by these factors and an adjustment factor for the increase represented by the potential claims was calculated.
The change to the opt-out approach will increase the level of disability discharges going forward, but not to the same degree as the significant adjustment in FY2020 that captures the build-up of years from those who did not submit applications. To estimate the adjustment for future claims, the Department focused on those newly identified as disabled in 2018 and calculated an adjustment factor based on those who received a discharge versus those borrowers with potential discharges who were in the match but did not submit applications. This adjustment was applied to future cohorts and future disability determinations for borrowers in past cohorts.
A separate adjustment was added to the disability rate to capture the effect of the SSA match switching to opt-out.
A review of existing borrowers identified in the SSA match file prior to September 30, 2020, indicates that there are approximately $11.5 billion in outstanding balances of borrowers who would be eligible for a TPD discharge.
This confirms that the potential increase in claims from existing and future cohorts is significant. The disability component of the DDB rate was almost doubled to estimate the effect of the SSA match opt-out process, resulting in the increase to $34.1 compared to the $1.96 billion estimated for only VA
match in the IFR.
A number of factors may affect the estimated cost of these final regulations.
The estimate does not include any reduction in defaults associated with the borrowers loans, but borrowers repayment profile will affect the cost of this discharge. For borrowers in the SSA
match prior to September 30, 2020, approximately 62 percent of loan disbursements across all loan cohorts have been in default at some point.
While the estimate for these final regulations is conservative and does not include any reduction in defaults, we know from prior analysis that a change such as this can have an impact on defaults going forward. As an example, a sensitivity analysis was done for the
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FY 2020 financial statements that showed that a 5 percent reduction in defaults for the last 5 originated cohorts saves $849 million. The Department will monitor the effect of these final regulations on defaults as the opt-out process is implemented and reflect it in future student loan program costs. Some borrowers may have lacked awareness of the potential discharge or found the application process difficult. To the extent borrowers previously chose to not apply for Federal tax reasons, the tax provision granting that relief is currently scheduled to expire on December 31, 2025. While that tax provision may be renewed, the opt-out rate for future discharges occurring in 2026 and later could increase if it is not.
In estimating the net budget impact of these final regulations, the Department reduced the adjustment factor for 2027
and later by 15 percent to account for this. If that provision is extended, or if more of the unfiled applications were for process reasons and did not reflect deliberate tax planning, the opt-out rate may decrease and the costs could go up.
We also assumed that the nonapplicants and future qualifying veterans and other borrowers will have a similar profile to applicants in terms of the amount of loans, repayment profiles, and the timing of their qualifying disability. It is possible that those who applied for a discharge as the result of the match had higher balances and thus more incentive to file, especially once the Federal tax consequences were removed.
Applicants and non-applicants could vary by debt level, educational attainment, nature of their disability, availability of support, or other factors that could result in the discharges granted through the opt-out process having a different average amount or subsidy cost for the Department.
Another challenge is predicting the effect on future loan cohorts. We assume the level and timing of service-related and other disabilities will remain similar to that for existing borrowers.
Clearly, geopolitical and global health factors that the Department cannot predict could affect the number of veterans and other borrowers who qualify for the discharge. Additionally, student loan borrowing among those who may serve in the military and eventually qualify for a discharge could increase depending upon recruitment patterns and further education pursued by those serving in the military.
However, it is possible that the relatively generous provisions of the Post 9/11 GI bill will reduce borrowing by more recent and future cohorts of veterans relative to past cohorts. An
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