Betsy DeVos and the Republicans wants to dump the Public Service Loan Forgiveness Program: Big Mistake

Betsy DeVos and the Republicans want to dump the Public Service Loan Forgiveness Program (PSLF)  because the program is too expensive. According to the Department of Education's Inspector General, costs of the government's various loan forgiveness programs shot up from $1.4 billion in 2011 to $11.5 billion in 2015--about a nine-fold jump.

In fact, all the Department of Education's loan-forgiveness programs are bleeding red ink. As the Government Accounting Office reported in November 2016, the Department underestimated the cost of these programs. For one thing, DOE assumed that student-loan debtors would sign up for a repayment plan and not switch.

But that's not what happened. Many college borrowers tried to repay their loans under DOE's standard 10-year plan but couldn't find jobs that paid enough to service their monthly loan payments. Millions then switched to income-driven repayment plans (IDRs), which lowered their monthly payments, but those payments were not large enough to cover accruing interest. In my estimation, most of the people in IDRs will never pay back their loans because interest is accruing on loan balances with every passing month.

PSLFs have specific problems, which make them particularly expensive for taxpayers.  First, the PSLF program, which was approved by Congress in 2007, defined eligibility far too broadly.  Anyone working for the federal, state or local government and anyone working for a nonprofit charitable corporation is eligible. As Jason Delisle observed in a Brookings Institution report, about a quarter of America's entire workforce is eligible for a PSLF plan.

PSLF advocates sometimes say the program was designed to encourage people to enter hard-to-fill public service jobs: police officers, fire fighters, ambulance drivers, and inner-city school teachers. But that description is misleading. Accountants, lawyers, public relations people--anyone working for the government or a non-profit--is eligible. 

And there's a second problem with PSLFs: Congress put no cap on the amount a PSLF participant can borrow. DOE apparently calculated costs based on the assumption that most PSLF beneficiaries had relatively low loan balances. But a lot of people applying for the program are people who accumulated massive debt from attending graduate school. A typical lawyer, for example, graduates law school with an average of $140,000 in accumulated student loans.

PSLF participants--including lawyers, accountants and MBA graduates--will make monthly payments based on a percentage of their adjusted income for 10 years, with the unpaid balance being forgiven when their 10-year repayment plans expire.  But most PSLF participants won't come close to paying off their loan balances after 10 years, and American taxpayers will be picking up the bill.

Thus, Trump and the Republicans have valid concerns about IDRs and PSLF programs.Nevertheless, I do not think these programs should be eliminated.

Why? Because 44 million Americans have student-loan debt and about half of them will never pay it back.  Congress has blocked bankruptcy relief for most of these people, which means they have two choices: default or sign up for an income-based repayment plan.

In my view, then, DOE's income-based repayment plans and the PSLF program should be continued  because the only other option for millions of distressed college borrowers is default.

But ultimately, there is only one way out of the student-loan morass. First. we must either allow insolvent student borrowers to discharge their college loans in bankruptcy or we must forgive the debt en masse. Second, we must shut down the venal and corrupt federal student-loan program and allow all Americans to get a free undergraduate education at a public college or university.

I realize this is a hard reality, which our government is refusing to face. But face reality it must; and the longer it waits to do so, the more people will be harmed by a student-loan program that is totally out of control.

Representatives Virginia Foxx: Republican Chair of the House Education Committee

References

Douglas Belkin, Josh Mitchell, & Melissa Korn. House GOP to Propose Sweeping Changes to Higher Education. Wall Street Journal, November 29, 2017. 

Ryan Cooper. The case for erasing every last penny of student debt. The Week, February 8, 2018.

Stacy Cowley. Student Loan Forgiveness Program Approval Letters May Be Invalid. New York Times, March 30, 2017. 

Danielle Douglas-Gabriel. GOP higher ed plan would end student loan forgiveness in repayment programs, overhaul federal financial aid. Washington Post, December 1, 2017.

Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, & Marshall Steinbaum. The Macroeconomic Effects of Student Loan Cancellation. Levy Economics Institute. Bard College, February 2018.

Jason Delisle. The Coming Public Service Loan Forgiveness Bonanza. Brookings Institution Report, Vol 2(2), September 22, 2016.

Andrew Kreigbaum. GAO Report finds costs of loan programs outpace estimates and department methodology flawed. Inside Higher Ed, December 1, 2016.

Eric Levitz. We Must Cancel Everyone's Student Debt, for the Economy's Sake. New York, February 9, 2018.

Amanda Palleschi. Student Loans Are Too Expensive To Forgive. fivethirtyeight.com, March 27, 2018.

US. Government Accounting Office. Federal Student Loans: Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates. Washington, DC: U.S. Government Accounting Office, November, 2016. 

Jordan Weissmann. Betsy DeVos Wants to Kill a Major Student Loan Forgiveness Program, Slate, May 17, 2017.

Department of Education miscalculates cost of income-driven student-loan repayment plans: More accounting fraud

The Obama administration touts long-term, income-driven repayment plans (IDRs) as a good solution for overburdened college borrowers who are struggling to pay back their student loans.  About 5.3 million borrowers are in IDRs now, and the Department of Education (DOE) hopes to enroll 2 million more borrowers in these plans over the next year.

IDRs allow borrowers to make student-loan payments based on their income, not the amount they borrowed, and to stretch the loan repayment period out from 10 years to 20 or even 25 years.

IDRs lower borrowers' monthly payments, which is a good thing. And, if IDR borrowers faithfully make their monthly loan payments for the entire repayment term (20 or 25 years), any remaining unpaid debt is forgiven.

And therein lies the big problem with IDRs. Many IDR borrowers are making payments so low that their payments do not cover accruing interest. Thus a substantial percentage of people in IDRs are seeing their loan balances grow over time--not shrink, even when they are making all their monthly payments on time. Many people in IDRs will never pay off the principal of their debt, which means that their student-loan debt will ultimately be forgiven with the forgiven amount being absorbed by taxpayers.

DOE regularly calculates the cost of IDRs to taxpayers,  but according to a report issued last month by the U.S. Government Accountability Office, DOE has seriously miscalculated those costs. GAO estimates that  $352 billion in federal student loans is being paid through IDRs for the 1995 through 2017 cohorts.  Of that amount, $137 billion--39 percent--will not be repaid (GAO report, p. 51). This is nearly double DOE's estimate of 21 percent.

GAO concluded that DOE has miscalculated the costs of IDR for several reasons:

• DOE did not differentiate among different IDR programs when calculating costs, in spite of the fact that some IDRs are more generous toward borrowers than others.

• DOE originally assumed that no one in GRAD PLUS programs would participate in IDRs, even though GRAD PLUS borrowers are eligible to participate. In fact, a lot of unemployed or underemployed people with graduate degrees are opting for long-term, income based repayment plans as the only way to manage their enormous debt.

• DOE assumed that all IDR participants would recertify their income annually, which is a requirement for continued IDR participation.  In reality, more than half of IDR participants are not recertifying their income on an annual basis, causing those individuals to be ejected from their income-drive repayment plans.

• DOE's cost analyses assumed that people in standard repayment plans would not switch to IDRs (GAO report, p. 37), but the Obama administration is actively encouraging borrowers to switch to IDRs. Currently, 40 percent of all federal student-loan dollars are now being  repaid through some sort of IDR (GAO report, p. 8).

The GAO also observed that DOE has made repayment projections based on the assumption that monthly payments would increase as borrowers' incomes go up over the years. But, as GAO pointed out, it is "challenging" to predict how much IDR borrowers' income will change over time and how much of their original loan balances will ultimately be forgiven and charged to taxpayers.

Jason Deslisle, a fellow at the American Enterprise Institute, said this about the GAO report: "Really what the GAO is saying is that the Obama administration's expansion of this [IDR] program has been done without good information about the effects."  And Alexander Holt, a policy analyst at New America, said the report shows "insane incompetence" on the part of DOE. 

But in essence, DOE is engaged in accounting fraud. We really don't know what it costs taxpayers to herd millions of student borrowers into IDRs, and DOE doesn't want us to know.

And you know what? DOE doesn't care what it costs. All it is doing is maintaining the charade that the federal student loan program is under control when in fact millions of Americans have student-loan debt they will never pay back.

References

Andrew Kreigbaum. GAO Report finds costs of loan programs outpace estimates and department methodology flawed. Inside Higher Ed, December 1, 2016.

US. Government Accounting Office. Federal Student Loans: Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates. Washington, DC: U.S. Government Accounting Office, November, 2016.