Changes Take The 'Forgiveness' Out Of Student Loan Forgiveness

The government is busy making changes to its student loan repayment programs. They say they're trying to help student borrowers and encourage cost-consciousness. In reality, the government is taking advantage of 18-year-olds who make decisions based on hope instead of reality...

Government backed student loans mean that nearly everybody can afford to go to college on borrowed money. That's a pretty good thing, what with higher education being an important public good. Plus, the only thing you can do with a high school diploma anymore is press license plates.

But a negative externality of the government guaranteeing loans is that schools can charge whatever they want. Whatever they want. Quick, what's the highest priced college in America? Nope, it's not Harvard or Yale or Princeton... those schools don't even crack the top ten. They've got the kinds of endowments that allow them to (relatively) keep tuition prices competitive. The most expensive school is Sarah Lawrence, just north of Yonkers, New York.

But what does a student care if Sarah Lawrence charges a ton of money? If they "like" the school, they can borrow the money. Sure, they'll have to pay it back, but that will be years — decades even — away. Surely they'll be rich or solidly middle class by then, and be able to pay off their debts without much problem. Many 18-year-olds just don't know what carrying, say, $150,000 of debt before they land their first job will do to the rest of their lives. And once they figure it out, well that's when you get 22-year-olds trying to turn their Comparative Post-Modern Literature degrees into law degrees... and taking on even more debt to do it.

The government has a solution to all of this. It's called many different things: the official name is the "Public Sector Loan Forgiveness" (PSLF) program. The initiative uses income-based repayment to help students who choose public sector (or qualified non-profit) jobs right out of school, instead of making as much money as they possibly can to pay off their debts. Loan payments are currently capped at 10% of "discretionary" income, and after ten years the government forgives your student debt. And yes, by "the government," I mean "taxpayers pay the rest." The school always gets its money.

Politicians from both parties, and President Obama, have called for changes to this program. You can see why. The program was intended to encourage public service by college graduates. Instead, it's being used as a carrot by expensive schools trying to entice students to take out more loans to afford their overpriced educations.

The new Senate budget proposal expands the program so that it can apply to more students. Currently, PSLF is only open to students who can show "financial hardship"; now, the government will assume anybody paying tuition at these prices and not working for Google probably needs some assistance. But there's a big catch: the government will not be nearly as "forgiving." From the bill:

Capping Public Sector Loan Forgiveness (PSLF) at the aggregate loan limit for independent undergraduate students to protect against institutional practices that may further increase student indebtedness, while ensuring the program provides sufficient relief for students committed to public service;

Establishing a 25-year forgiveness period for borrowers with balances above the aggregate loan limit for independent undergraduate students.

And the amount forgiven will be capped at $57,500, which is barely a year of tuition at the nation's most expensive schools.

White House officials argue that these proposals will encourage students to be cost-conscious about their school choice, while also encouraging schools to keep tuition costs under control. But that is utter hogwash from the White House.

I've explained on Above the Law that there is absolutely nothing in these proposals that will encourage students to take a low-cost educational option. Students don't choose education based on what might go wrong. Education is an aspirational choice that people make in hopes of what might go right. Nobody is going to go to the University of Tennessee at a discount over Vanderbilt at twice the price because the government might only pay off $57,500. They're thinking that Vanderbilt will give them much better options. How much better? Options to do what? They don't freaking know. They're 18. "I'll get a good job that allows me to pay my bills. Also, I'm going to change the world, end up with a spouse who will love me forever, and have a house with a big yard for my unicorn."

But whatever, if the new program makes one student think more critically about financing his or her education, maybe it's worth it. The problem is that this does nothing to encourage schools to be more cost-conscious. Schools can still charge whatever they want while promising students government backed loan forgiveness. So it'll take 25 years instead of ten... isn't our expensive private school education worth it? Isn't it worth it for your future?

You want to do something that would actually make schools think twice about their price? You've got to make them put some skin in the game. Maybe the school should pay the taxpayers back after 25 years? What would be wrong with that? If their students can't pay back all the money the schools charged them after 25 freaking years, the schools should be on the hook for the rest of the loan.

I bet that would make a school think twice before jacking up tuition another 5% to pay for a faculty lounge.

Changes To Government Loan Forgiveness That Totally Miss The Mark [Above the Law]