In this season of giving and forgiving, it is time to reflect on the many ways that federal government programs unintentionally harm the poor and reward the rich. One such program is the Public Service Loan Forgiveness Program (PSLF), which provides full forgiveness of the remaining balances due on federal direct and consolidation student loans for employees of government agencies and nonprofit organizations after they have made 10 years of qualified payments under one of four federal income-driven payment (IDR) plans.
Politicians who support the PSLF program believe that it provides a necessary incentive for college graduates to enter professions such as social work that may pay less than jobs in private-sector businesses. For this reason, at least four Democratic presidential candidates (former vice president Joe Biden, South Bend, Ind., Mayor Pete Buttigieg, Sen. Amy Klobuchar of Minnesota and former Housing and Urban Development secretary Julian Castro) have proposed simplifying and expanding the PSLF program. Such changes would be unnecessarily redundant under the broad loan forgiveness plans proposed by Sens. Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.).
Initially thought to be a small program, the PSLF has emerged in the past two years as another out-of-control entitlement. Since a minimum of 10 years of qualified IDR payments is needed before the triggering of PSLF forgiveness, the earliest loans to qualify matured in the fall of 2017. Even before that date, the Brookings Institution warned that, as of the second quarter 2016, 431,853 individuals had certified at least some qualifying payments.
With some foresight into the looming costs of PSLF, the Obama administration proposed in 2014 to cap loan forgiveness at $57,500. The Congressional Budget Office projected 10-year savings of $6.7 billion from this proposal, but the plan was rejected by Congress.
The main flaw in the PSLF program remains intact — the fact that it attracts a high number of participants whose loan balances derive from attendance in graduate and professional degree programs. Brookings noted that the median student loan debt of PSLF borrowers was $60,000 in 2016, with nearly 30 percent of them shouldering debt exceeding $100,000. Their conclusion was: “The high loan balances among enrollees helps to expose that PSLF is really a de facto loan forgiveness program for graduate students, who can borrow without limit.”
The incentives caused by the PSLF program have driven up graduate student borrowing to unimagined heights. As the American Enterprise Institute has noted, Congressional Budget Office “fair value” accounting estimates of taxpayer costs for graduate lending have risen from $4 billion in 2016 to $12 billion in 2019.
PSLF subsidies to graduate students are considerably higher than to individuals who have earned only undergraduate degrees. As of the class of 2016, graduates from four-year degree programs owe an average of $37,172 in student loans. U.S. Department of Education statistics indicate the average student loan debt for those who have earned graduate degrees is $84,300. This ranges from an average of $66,000 for master’s degrees to $186,600 for professional degrees, including law and medicine.
Without the Obama administration’s loan forgiveness cap, and with the smaller payments borrowers make under the income-driven payment plans leaving higher outstanding balances at the end of 10 years, the reverse Robin Hood effect of the PSLF is revealed. The biggest subsidies go to those with the highest levels of education, which axiomatically means they will have the highest average lifetime earnings.
In addition to this injustice, the IDP plans themselves add unnecessary costs for many borrowers, because the interest clock is still ticking during the 10 years of qualified loan repayments before the PSLF forgiveness provisions kick in. The so-called standard repayment period would have the entire loan repaid after 10 years. Certainly not everyone will have the postgraduate earnings to repay their loans under the standard payment plan, but the IDP requirement for the PSLF may fool some borrowers into choosing the deferred loan forgiveness option at the cost of paying out more interest.
Just as many people take out a 15-year home mortgage, rather than a 30-year loan, to save a considerable amount of interest by paying down a proportionately larger amount of principal, those who can afford to make payments under the standard schedule may well fare better than those who choose the IDP payment option to qualify for the PSLF program. The math works perversely, because the higher the initial loan balance in proportion to income, the higher the subsidy value is for the PSLF program, after subtracting the extra interest paid under the IDP plan.
President Trump has proposed eliminating the PSLF program a number of times since 2018. Politics has triumphed over common sense and fairness; Trump’s critics have castigated him for daring to consider eliminating a program they believe would help deserving individuals improve society through employment in public service occupations.
The fact that the subsidies mostly go to those who are, and will be, economically better off goes unnoticed. Small government advocates and deficit hawks like me would rather have the taxpayers pocket the savings, but even hard-left progressives should be able to find ways to spend taxpayers’ money in a fairer and more effective manner.
British classical liberal Ernest Benn noted nearly 80 years ago, “Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly and applying the wrong remedies.” Clearly, the PSLF program is the wrong remedy.
C. Ronald Kimberling, Ph.D., is a research fellow with the Independent Institute. He was the U.S. assistant secretary for postsecondary education during the Reagan administration. He holds a doctorate in English from the University of Southern California.