The Public Service Loan Forgiveness Program is a train wreck, and $350 million won't fix it.

The Public Service Loan Forgiveness program (PSLF), created by Congress in 2007, allows people in public service jobs to make income-based student-loan payments for ten years. If they make 120 payments, their loan balances will be forgiven and the amount of the forgiven debt isn't taxable to them.

Such a deal!

Thousands of student debtors relied on PSLF to manage huge debt burdens. In fact, as Paul Campos correctly noted in his book Don't Go to Law School (Unless), people who graduate from bottom-tier law schools with six-figure student debt have only one option for paying off their student loans: the PSLF program.

Last fall, the first wave of PSLF participants became eligible to have their loan balances forgiven, but Betsy DeVos' Department of Education put impediments in the way and told some student debtors they were not eligible. The American Bar Association sued DOE after it declined to honor an application by ABA employees for public-service loan forgiveness.

Prompted by Democratic legislators--notably Senator Elizabeth Warren--Congress set aside $350 million to pay off student loans owed by people who failed to qualify for PSLF through no fault of their own.

That's a good first step, but $350 million won't fix this problem. As Jason Delisle explained in a 2016 report for the Brookings Institution, the PSLF program has problems DOE didn't anticipate, and those problems will be expensive to fix.

First of all, public service employment as Congress defined it includes anyone who works for federal, state, or local government and anyone who works for a 501(c)(3) nonprofit entity. As Delisle pointed out  (p. 3), that definition encompasses about one quarter of the American workforce.

In fact, nearly all the doctoral students I've taught over the last 25 years work in public sector jobs; and most of them have student-loan debt, which they expect to shed through the PSLF program. For example, one of my recent doctoral graduates accumulated $140,000 in student-loan debt on her journey to obtaining an Ed.D. degree. PSLF is her only escape hatch for shedding this enormous debt.

Without any question, the PSLF program was poorly designed. The category of eligible participants was defined far too broadly.  Although program defenders say PSLF is intended to aid firefighters, police officers, and teachers, it also benefits public-service lawyers, lobbyists, and accountants.

Furthermore, Congress placed no cap on the amount of student debt that can be forgiven under PSLF. At roughly the same time Congress enacted the PSLF program, it approved the Grad PLUS program, which allows graduate students to borrow the entire cost of their graduate or professional education with no dollar limit.

Apparently DOE was surprised by the enormous debt loads carried by people seeking to shed their student loans through PSLF.  But it should have been obvious to everyone that law-school and business-school graduates with $200,000 in student-loan debt and no prospect of a well-paying private-sector job would look to PSLF to manage their debt.

In short, DOE underestimated the number of people eligible for PSLF and the amount of money they owe. Taxpayers are going to spend a lot more on PSLF than DOE anticipated.

So what to do?

In my view, the Department of Education should forgive student-loan debt for everyone who has accumulated 10 years of public service since the PSLF program was enacted in 2007--regardless of whether the PSLF applicant filled out the proper paperwork. And it should allow everyone currently working in  a public service job to participate in the PSLF program and receive loan forgiveness after they've made 120 payments.

And then Congress needs to amend the program to put a cap on the amount of student-loan debt that can be forgiven under PSLF, and it should limit future participation to people working in hard-to-fill public sector jobs--police officers, fire fighters, teachers, etc.

No doubt about it--PSLF is a colossal train wreck; and it will cost the federal government billions of dollars to fulfill the promises Congress made eleven years ago. The Congressional Budget Office estimates that PSLF and income-based repayment programs together will cost taxpayers $12 billion over the next ten years (as reported by Jason Delisle). The $350 million Congress appropriated last March is but a small down payment.

The Public Service Loan Forgiveness Program is a Train Wreck.

References

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

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

Andrew Kreighbaum. New Fix for Public Service Loans. Insider Higher Ed, May 24, 2018.

Andrew Kreighbaum. Senate Democrats want Public Service Loan Forgiveness Fix in budget agreement. Inside Higher Ed, February 16, 2018.

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