Paul L. Caron

Sunday, September 25, 2016

End The Public Service Loan Forgiveness Bonanza For Graduate And Professional Schools

Brookings (2016)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.

Brookings 1A

Enrollment in PSLF and IBR Is Booming: ...

Brookings 1

Brookings 2

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.

Brookings 3

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.

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Did anyone else in grad school see a correlation between high debt loads and living high on the hog? I was in grad school for many years and invariably the classmates I met who disclosed very high debt loads also happened to be living high on the hog. I mean, had cars, huge apartments, ordered the most expensive things at restaurants, didn't buy books online, went on pleasure trips abroad, etc., while meanwhile, students without such debt loads were living very frugal lifestyles.

Posted by: Jan | Sep 25, 2016 6:49:33 AM

Income based repayment for law school is a dead man walking.

Posted by: Jojo | Sep 25, 2016 7:24:03 AM

This again. Jason Delisle has been pretty much the sole torchbearer on "Cancel PSLF" for at least as long as I've been commenting on higher education. Perhaps that is because he is a former staffer for Rep. Thomas Petri (R-WI), who made the cancellation of PSLF a pet issue pretty much as soon as it was passed. DeLisle's background is germane here: he attended a very expensive liberal arts college, followed by a six-figure MPP from GWU, and followed by a career in the public sector. So he is wildly against his own self-interest or he's never actually held a student loan despite his very expensive education... Perhaps he believes public service should only be for the wealthy or well-scholarshipped? Because that is the only possible result of cancelling PSLF, a program brought to us by that well-known liberal George W. Bush. Perhaps it is just old-fashioned neoliberalism (he has worked at Brookings and AEI, after all). Perhaps he doesn't think the public sector & government should be allowed to make any effort whatsoever to incentivize the best & brightest who would otherwise skitter off to Wall Street or corporate law firms. Perhaps the lack of awareness of all of the unintended consequences of his proposal are troubling.

Oh, and Obama's addendums in 2010, 2012, and 2015 were ALL to IBR. He hasn't touched or changed PSLF at all. Nope. DeLisle's false aggregation of IBR, PAYE, and REPAYE is also grossly reductive and misleading. Grad students pay an extra five years under REPAYE than PAYE, for instance. The repayment rate is 5% higher under IBR than PAYE. They all have different eligibility requirements. Interest principalization is treated very differently under REPAYE, and household income is ALWAYS the benchmark even if you are married & filing separately. Etc., etc., etc. These are not distinctions without importance, particularly for supposed policy wonks. But then again, this whole platform is just a continuation of his erstwhile boss's decade-old pet peeve.

Oh, and a quarter of the jobs in the economy? Dude, fewer than 900,000 people get post-bachelor's degrees each year in the US (NCES data), and some of them have family/jobs/etc. pay for them. There ~160 million jobs in the country. So no, PSLF isn't subsidizing grad degrees for a quarter of the workforce. Sloppy strawman is sloppy.

Posted by: Unemployed Northeastern | Sep 25, 2016 8:38:23 AM

An increase of $6 billion in costs for a national higher education program isn't "staggering" in the context of a $19 trillion dollar economy and a $4 trillion federal budget.

We're talking fractions of fractions of a percent of any relevant number and less than $100 per student debtor.

Posted by: staggering | Sep 25, 2016 11:06:52 AM

The views of the American Enterprise Institute can be summarized as follows:

-The only good government spending is military spending

-Even though though the U.S. and it's allies already account for 80 percent of global military spending, the U.S. needs to spend more on the military or we'll all be in mortal danger

-The U.S. should rebuild the rest of the world in its own image (Iraq, Afghanistan) at any price

-Anything to build and improve the U.S.--infrastructure, science, healthcare, education, anti-poverty--is a waste of money

-Global warming isn't real--climate scientists and crafty Scandinavian windmill manufacturers made it up to sell more green energy

-Tax cuts pay for themselves

-After 4 decades of tax cuts, we can't afford to pay for any government spending except the military

Mr. Delisle will fit right in.

Posted by: eat the seed corn | Sep 25, 2016 11:40:24 AM

This article is fairly researched and arrives at a logical conclusion. Having said that, however, it kind of irritates me how much time and energy has been spent by this author over the past four years fixating on various attributes of a government initiative which, if anything, encourages a result that the U.S. strives for in order to remain a competitive economy (i.e. advanced educated workforce). Meanwhile, countless other provisions of law - federal tax depreciation rules to name one area - which are just as (if not more) oblivious to economic reality, not to mention far more expensive to taxpayers than a $12B over a decade figure, receive comparatively little scrutiny. It reminds me of the punditry surrounding BAPCPA in 2005 – a lot of anecdotal reasoning, and it’s not really going to move the needle much anyway, especially versus the pain it inflicts on its subjects. You would correctly assume I am biased.

Posted by: Ted | Sep 25, 2016 12:44:08 PM


Not to mention that the $6 billion in costs over ten years is set against the 2014 projection by the Dept. of Ed. that student loans made over the next ten years will result in about $127 billion in profits to the government. No doubt DeLisle, like Senate Republicans, wants us to believe that we should be using fair value cost accounting to account for potential losses from defaults and such, even though the government ends up collecting 90 cents on the dollar from defaulted federal student loans after collection costs (and in some instances more than 100 cents on the dollar. Moral hazard alert!).

Posted by: Unemployed Northeastern | Sep 25, 2016 2:03:26 PM

And as Matt Leichter pointed out last year, despite DeLisle's strawmanning, the GAO found last year that 70% of IBR filers and 83% of PAYE filers MAKE $20,000 PER YEAR OR LESS. Only 2% of IBR filers and 1% of PAYE filers make $80,000 per year or more, which is a hopelessly inadequate amount to make full repayment if someone is coming out of a law school owing $200k to $250k or more. But whatever. Much like the million dollar degree, the six-figure earning PSLF loan cheat is a meme that is hard to kill.

Posted by: Unemployed Northeastern | Sep 25, 2016 6:25:40 PM

No government student loan assistance program should ever promise to forgive an unlimited debt balance. Even public service minded students should be required to think about cost of attendance, and participate in pressuring schools to lower them. I support PSLF, but the debt forgiveness should be capped at $100k.

Posted by: JM | Sep 26, 2016 6:21:09 AM

It is unconstitutional to have taxpayers subsidize students to be Democrats. It is not just a fact on the ground that 90% of non-profits are politically leftist. It is also ideology.

Conservatives believe that productivity is measured by what other people are willing to pay them for the value they provide. The far left that is now the center of the democratic party believes that economic liberty is evil and that good is only done when resources are extracted from the private economy and spent by government or non-profits.

The constitutional provision that is violated is the article IV section 4 guarantee to the states that they shall have a republican form of government. The Supremes have been too stupid to figure out what that means but Alexander Hamilton explained it perfectly clearly at the constitutional debates.

The fundamental principle of republicanism is that the people shall choose who shall represent them. That is, the people can always "throw the bums out." It is the people who are the master and government the slave.

When tax payer money is used to pay people to be a certain kind of people then instead of the people choosing their government the government is choosing the people. Government has become the master and the people have become the slave, inverting the Master slave relationship of the government to the people and violating the Republican guarantee. Very serious stuff.

Posted by: Alec Rawls | Sep 26, 2016 8:44:03 AM

It's good that we're debating this topic. But we should keep in mind that, should Hillary become president, she'll veto any legislation that keeps deep-pocketed groups with from enriching themselves at the public expense.

And there's probably no more powerful lobby that the upper tiers of the federal government.

Posted by: Michael W. Perry | Sep 26, 2016 12:32:15 PM