A program that allows borrowers to have their student loans forgiven for entering into a public service career could come with unforeseen consequences.
The Public Service Loan Forgiveness (PSLF) Program gives borrowers the opportunity to have the balance of their loans forgiven after they make 120 qualifying monthly payments (roughly 10 years) under a payment plan while working full time for a qualified employer, many of which are included in the education sector.
Since 2012, borrowers were able to certify with the Department of Education that their employment qualified them for PSLF. Since then, the number of borrowers has grown to 431,853 as of June 30, 2016 with enrollment growth continuing to increase.
The reason for this growth is largely due to the broad definition given to the term public service. Any borrower is eligible who works for a federal, state, or local government and not-for-profit organization. It has been estimated that nearly a quarter of the workforce is eligible for loan forgiveness through PSLF. Borrowers can also retroactively claim benefits, which make the enrollments in PSLF harder to track.
This program seems to benefit highly educated borrowers with graduate degrees the most; for instance, borrowers who enroll in PSLF tend to have higher student loan debt. The median debt of those enrolled is more than $60,000 and a third of those enrolled have borrowed more than $100,000. According to Jason Delisle, a resident of the American Enterprise Institute (AEI), PSLF offers an incentive for both students to borrow more money for graduate school and for schools to set higher prices.
In a 2014 paper written with policy analyst Alexander Holt, Delisle outlines the incentives PSLF offers students considering graduate school. They found that a student who pursues a Master’s Degree in either Education or Social Work and accumulates a loan amount of $28,000 while receiving his undergraduate degree is likely to have all the money he borrows for his graduate degree forgiven under PSLF.
The benefit to PSLF is that the program allows borrowers to pursue lower-paying careers that can benefit society. So the answer may be to simply find a way to reign in the program and minimize the costs to taxpayers.
The Obama administration has proposed setting a cap on loan forgiveness of $57,500 for all students. This reform would address the most excessive features of PSLF but still provide a large amount of loan forgiveness. Even with the Congressional Budget Office estimating that a cap on all public service loan forgiveness could save the federal government 5.4 billion dollars over the next 10 years, the proposal has not gained any traction in Congress.
The program was created in 2007, so borrowers may receive debt forgiveness by October 2017 at the earliest. The ultimate cost of the program will be hard to determine until the borrowers’ debts are cancelled. Afterwards, a much clearer picture of PSLF will be available.