Department of Education slow rolls the Public Service Loan Forgiveness Program: Like a drunk weaving through traffic

For many years, the Department of Education has managed the federal student-loan program like a drunk creeping through heavy traffic. It has stumbled, reeled, dissembled, weaved and bobbed, but always avoided a head-on collision with reality.

But that time is over. Under Betsy DeVos's colossal mismanagement (and her predecessors), DOE has messed up the Public Service Loan Forgiveness Program (PSLF), thereby telegraphing to 44 million student-loan borrowers that Betsy Devos is either fiendishly devious or spectacularly incompetent.

The PSLF program is not complicated.  Under federal law, student-loan borrowers who work for a qualified employer (governmental agency or non-profit) and make 120 student-loan payments under an approved repayment plan are eligible to have remaining student-loan debt cancelled. (It's a little more complicated than that, but not much.)

Almost 1.2 million borrowers have applied to have their employment certified for PSLF eligibility. More than a quarter million applications were denied. That alone is a startling fact.

But it gets worse. About 28,000 people who are in the PSLF program (or at least believe they are in it) applied to have their student loans forgiven based on their representation that they had made the 120 required student-loan payments. How many people have obtained debt relief so far? Less than 100!

What are we to make of this gigantic snarl?

First, DOE has made the PSLF program needlessly complicated. After all, the government only needs to answer two questions to determine who is eligible for debt relief. Did the applicant work for an approved employer for 10 years? Did the applicant make 120 one-time payments on his or her student loans?

Second, the PSLF program was poorly designed, and DeVos's DOE has reached the startling realization that the program is astonishingly expensive.  In my opinion, DOE is dragging its feet about processing PSLF claims to postpone the reckoning day, when it will have to publicly admit that PSLF is going to cost taxpayers billions of dollars.

The Government Accountability Office (GAO) released a report almost two years ago that concluded DOE had underestimated the cost of various student-loan repayment options. I'm guessing DOE did not figure on the huge debt loads some PSLF applicants were accumulating from going to graduate school: MBA degrees, medical degrees, law degrees, etc.

According to GAO, the average amount of forgiven debt for the first 55 people who received student-loan forgiveness is almost $58,000. If  this average continues to hold, and all 890,000 people whose loans and employment were certified eventually get debt relief, the cost will be $50 billion! Meanwhile, DOE can expect PSLF requests for certification and debt relief to continue being filed into the indefinite future.

No wonder DOE is slow rolling the PSLF loan-forgiveness process.

 References

Stacy Cowley. 28,000 Public Servants Sought Student Loan Forgiveness. 96 Got It. New York Times, September 27, 2018.

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.