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When Congress created a program in 2007 to forgive student loans of people who work in public service for 10 years, the expectation was that the program would be small. But after the Obama administration made the program more generous in 2012, I warned that the program’s ill-defined terms would forgive far more debt than originally anticipated. And last week the Congressional Budget Office confirmed those fears when it estimated that the program will cost $24 billion over the next 10 years, double what the CBO estimated just two years ago.
This is not the first time that the CBO revised its estimates so sharply upward, and it probably won’t be the last. Few people realize, however, that lawmakers could end the program tomorrow, saving taxpayers billions, and student loan borrowers working in public service jobs would still be assured affordable monthly payments on their debts. In fact, their monthly payments wouldn’t be any higher than they are under the current terms.
What is this loan forgiveness program, where did it come from, and why is the CBO rapidly revising its cost projections upward? Since the 1950s, the federal government has offered student loan forgiveness programs for certain public employees. But these programs were small and limited to narrow job categories, like teachers in schools serving low-income students, and the amount of debt that could be forgiven was capped at low amounts, such as $5,000.
Then, a decade ago, lawmakers enacted a loan forgiveness program called Public Service Loan Forgiveness, a sweeping expansion of these targeted programs. Under PSLF, public or nonprofit employees make monthly loan payments tied to their income level; after 10 years of payments, the government forgives the rest of their federal student loan balances. A huge number of Americans are potentially eligible for the program: “Public service” includes any job at any level of government, or any job at a 501(c)(3) nonprofit organization—a definition sweeping enough to cover 25 percent of the workforce. There also are no limits on the amount that can be forgiven after 10 years of payments. The program even allows graduate students to accumulate unlimited federal loans to cover the entire cost of their education and living expenses, and then have the debt forgiven.
Despite the broad eligibility terms, Washington policymakers did not foresee the program growing to its current size. After all, 10 years is a long time to work in a qualifying job, so many experts thought people wouldn’t sign up. They also thought borrowers were averse to making loan payments linked to their incomes, as hardly anyone enrolled in an earlier version of the government’s income-based repayment plan. Nor did policymakers explicitly connect PSLF with the program that lets graduate students borrow unlimited federal funds; that was a separate policy enacted the year before PSLF.
Early warnings that PSLF could grow out of control were easily dismissed as speculation. Even after it was enacted, the government declined to collect or publish information on it. There were no enrollment figures, no statistics on the debt level of participants, and most importantly, no smoking-gun number in the federal budget showing how much debt the government would have to write off.
That has started to change. The latest CBO estimate, which came as part of the budget agency’s analysis of President Donald Trump’s proposal to end PSLF for new borrowers, is part of the growing evidence that the program will forgive far more debt for far more people than anyone originally thought. The Department of Education now publishes enrollment figures that show nearly 60,000 new borrowers enroll in PSLF every quarter. Other Department statistics show that most participants borrowed well in excess of $50,000 in federal loans and one-third borrowed more than $100,000. Such high debt levels indicate that the program is mostly benefiting borrowers with graduate degrees.
If those statistics aren’t convincing evidence of a problem, the “repayment estimator” available on the Department’s website should be. Enter in a borrower with $50,000 in debt earning an adjusted gross income of $40,000 and the site calculates the amount of debt the student would have forgiven. (Note that adjusted gross income excludes an individual’s pre-tax contributions to things like health insurance premiums, retirement savings, and even student loan interest payments.) Payments over 10 years total $30,168, nowhere near enough to pay the debt, which means she has $49,832 in principal and accrued interest forgiven. Enter in $100,000 in debt, and the borrower still makes payments of $30,168, but the amount forgiven is a whopping $129,832.
Let that sink in for a moment. Payments are the same if the student borrows $50,000 or $100,000. Taxpayers foot the bill for the difference. One has to wonder whether PSLF would have been enacted if the department launched its repayment estimator before the lawmakers voted to create it.
There is another reason to repeal PSLF for new borrowers: It is duplicative. A program known as Income-Based Repayment already ensures that someone working in a lower-paying public service job can make affordable monthly payments by linking their monthly loan payments to their income. After all, IBR is open to all borrowers regardless of where they work. In fact, IBR also forgives unpaid debt, but after 20 years of payments not 10. That is still a bit generous for borrowers with above-average debt, which is why Trump has proposed expanding the timeline for loan forgiveness to 30 years for graduate students. (On the other hand, forgiven debt under IBR should be tax-free like it is for PSLF. Under current policy it is taxable income.)
Trump is right to call for an end to PSLF. Unlimited loans, unlimited loan forgiveness, and a definition of public service that encompasses 25 percent of the workforce is a ticking time bomb for taxpayers. Now it is up to Congress to act.