Brookings Institution: The Coming Public Service Loan Forgiveness Bonanza, by Jason Delisle (American Enterprise Institute):
Abstract: The federal government is making more data available about the performance of the Public Service Loan Forgiveness (PSLF) program for federal student loans. Many policymakers are not aware of this program, but the new data reveal PSLF is growing rapidly and is larger than most observers expected. Budget agencies recently revised the projected cost of the program upward by a staggering amount, and the U.S. Department of Education reports that many PSLF enrollees borrowed over $100,000 to finance graduate degrees. Recent research suggests that borrowers in certain professions stand to have their entire graduate and professional educations paid for through loan forgiveness under PSLF. In light of these developments, reforms that limit the most excessive features of PSLF are warranted, although repealing PSLF altogether and letting the federal Income-Based Repayment program (IBR) accomplish the goal of PSLF is an even better course of action.
What Are Income-Based Repayment and Public Service Loan Forgiveness? ... Anyone with a federal student loan who works in public service can currently cap his monthly payments at a fixed share of his income and the government will forgive all remaining debt after 10 years. Two distinct programs are at work here: Income-Based Repayment (IBR) and Public Service Loan Forgiveness (PSLF). Both were enacted in 2007, but the Obama administration enacted policies to make them significantly more generous in 2010, 2012, and again in 2015.
Income-Based Repayment. Through IBR, any borrower can cap payments on his loans at 10 percent of a portion of his income, which is calculated by deducting 150 percent of the poverty line for his household size ($17,655 for a single person without dependents) from the adjusted gross income stated on his federal tax return. ... IBR also goes by two other names, Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE), but the benefits are nearly identical across all three. For simplicity, this piece will collectively refer to the programs as IBR. Note that borrowers may use IBR regardless of the type of job they have. It is not limited to public service employees. ... After 20 years of payments, the federal government forgives all remaining unpaid interest and principal. Prior to the Obama administration’s changes, payments were 15 percent of income, ... or 50 percent more than what borrowers now pay under IBR. Loan forgiveness also kicked in not after 20 years but 25.
Public Service Loan Forgiveness. Under the separate PSLF program, borrowers employed full-time in a public service occupation who use IBR receive loan forgiveness much sooner—after only 10 years of payments. ... Unlike other loan forgiveness programs targeted at certain professions, PSLF defines public service broadly enough to encompass a quarter of the U.S. workforce. Eligible employment includes any position at a federal, state, or local government entity, or non-profit organization with a 501(c)(3) designation ...
PSLF Costs Are Skyrocketing ... CBO estimates that just two features of IBR and PSLF that favor those with the largest loans and incomes will cost the taxpayer over $12 billion in forgiven loan repayments over the next 10 years.
Enrollment in PSLF and IBR Is Booming: ...
PSLF Borrowers Have Unusually High Loan Balances: ... The median debt load of those enrolled in PSLF exceeds $60,000, and nearly 30 percent of PSLF enrollees borrowed over $100,000. The high loan balances among enrollees helps to expose that PSLF is really a de facto loan forgiveness program for graduate students, who can borrow without limit. Dependent undergraduates may borrow no more than $31,000 in federal loans spread out over five years of education ($57,500 in the case of independent students). Yet 80 percent of borrowers in PSLF borrowed more than that, meaning the program is dominated by students who attended graduate and professional school.
Distorting Incentives for Graduate School: The disproportionate share of graduate and professional students using PSLF should be a wake-up call for policymakers. In fact, PSLF provides a big incentive to borrow more for graduate school. ... Students who might balk at the high price of a graduate degree that is not likely to lead to a large increase in their earnings now face much lower effective prices for the degree—even a price of zero. That is bound to allow schools to set prices higher than they otherwise would and offer degrees with questionable value in the labor market. ...
The Case for Curtailing PSLF: ... For policymakers who see a well-intentioned loan program spiraling out of control and distorting the graduate school marketplace, there are a number of sensible reforms that they can enact. ...
Setting a cap on forgiveness and eliminating the non-Income-Based Repayment cap. The Obama administration has already suggested a very limited set of reforms for PSLF, capping loan forgiveness at $57,500 for all students (the maximum that an independent undergraduate can borrow in federal loans) and eliminating the non-Income-Based-Repayment cap. ... The most a student can receive through the Pell program is $34,890 over six years of enrollment. In fact, that amount might serve as a better limit for PSLF, on the grounds that the government shouldn’t provide those who attended graduate school—the students who are most likely to have the full $57,500 forgiven—with a larger benefit than low-income students pursuing an undergraduate education. Scarce student aid dollars should be devoted to helping students earn undergraduate degrees, not graduate degrees.
Narrowing eligibility for public service. PSLF should use a much stricter definition of public service. In its current form, the program encompasses an overly broad cross-section of the workforce. Ironically, the current definition of public service is so broad that it treats identically situated borrowers very differently. ... Two nurses living in the same city with the same earnings and debt levels, one working at a for-profit hospital and the other at a non-profit hospital; two IT professionals working across the street from one another, each with the same income and debt levels, one working at a small non-profit, the other working at a small business. These individuals receive very different levels of government support for arbitrary reasons, because of how PSLF defines “public,” but not because they are engaged in different types of work. A clearer and stricter definition of public service would prevent such scenarios, treat similarly situated borrowers the same, and better target incentives to fill shortages in specific fields.
The Case for Eliminating PSLF: While the above changes would address many of the flaws in PSLF, a strong case remains for eliminating it altogether and letting a standalone IBR program do what PSLF is meant to accomplish. Time and time again, policymakers make the claim that the purpose of PSLF is to ensure borrowers are not constrained in their career choices by unaffordable student loan payments. Yet IBR does much to further that goal because it sets a borrower’s payments to an affordable and fixed share of his income—and it provides loan forgiveness. ... [T]he IBR program provides large subsidies to borrowers with lower incomes and high debt balances, the very borrowers PSLF is meant to target. That makes PSLF redundant at best and excessively generous at worst.
Conclusion: Policymakers appear to know little about the Income-Based Repayment program and the Public Service Loan Forgiveness benefit for federal student loans. That lack of awareness is troubling, as these programs are a major force in how students are financing their educations. It is fair to wonder then whether lawmakers really intended for PSLF to be an open-ended loan forgiveness program for a quarter of the jobs in the economy.