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Is PSLF Good Fiscal Policy?

Is Trump Scrapping the Beleaguered PLSF Program?

The Washington Post reported earlier this week that the Trump adminstration is planning to end the Public Service Loan Forgiveness (PSLF) program. While the Obama administration had already planned to cut the program back, the recent news has the internet buzzing. The WhiteCoatInvestor forum already has a healthy debate going on regarding the proposed changes. Regardless of your political views, one thing is for certain – the United States is teetering eerily close to a full blown student loan crisis.

What is PSLF?

In 2007, under the Obama administration, Congress approved PSLF. The purpose of PSLF was to help college, graduate, and professional school graduates manage their student loan debt while workin in public service. Basically, the PSLF program forgives any remaining balance of your student loans after making 120 qualifying monthly payments (10 years). A qualifying monthly usually means making payments under an income-driven repayment plan, where your payment is determined by your monthly income. While Obama recommended capping the benefits at $57k, Trump and Betsy DeVos (Secretary of Education) have hinted at ending the program completely. It is unclear whether current participants would be grandfathered in, although the federal government has already started backing out of some of its PSLF committments (no suprise there).)

Supporters of PLSF state that it helps public servants get out from under crippling debt. Critics argue that PLSF has exacerbated the student loan bubble, indirectly leads to higher tuition, and encourages borrowers to “game the system” by incurring excessive debt while knowing that they won’t have to pay it back in full. In fact, many recent graduates have planned their whole careers and borrowing strategy around PSLF.

How Does Student Loan Forgiveness Contribute to the Student Loan Crisis?

 The PSLF program is undoubtedly enticing for students considering career fields that can benefit from the program. Using a combination of income-based payments and a fixed number of payments until complete loan forgiveness, it is entirely possible for students to receive more loan forgiveness than what they actually borrowed, after interest is accounted for. It is essentially a “get out of jail free” card. It is important to remember that students can borrow up to the entire cost of education, including tuition, books, and room and board – and all of this is forgiven after meeting requirements. 

Take this example, as illustrated by US News. A typical pharmacist could take out $200,000 in student loans (not unusual with the cost of school these days). If the pharmacist started off at an average salary, they would end up paying back about $59,000 of the loan over 10 years. However, after interest was accounted for, the government (i.e. you, the taxpayer) would be on the hook for $220,000, which is more than the amount originally borrowed, and significantly more than the amount payed back by the debtor! In fact, in nearly every scenario from schoolteachers to social workers to lawyers, it makes sense to carry more debt with the PSLF program!

The real problem is that this kind of irresponsible fiscal policy encourages schools to keep increasing the cost of tuition, so that they maximize their profits. Tuition cost increases have outpaced consumer inflation and even health care inflation over the past several decades. As students struggle to afford these costs, universities, professional schools, and online degree programs are sprouting up all over the place to harness the readily available government subsidized money. This “cheap” money is produced on the backs of the taxpayers and students. This loan forgiveness incetivizes borrowers to take out the maximum possible amount in loans, regardless of need or financial prudence.

tuition-costs Is PSLF Good Fiscal Policy? FINANCIAL NEWS O-T (Off-Topic)

Societal Considerations of PSLF

Some argue that PSLF should remain in place, but not be available to certain high-income professionals, such as doctors and lawyers. On the surface, this argument has some merit. The program was generally intended as a relief program for those going into public service, with incomes that make it difficult to repay student loans. However, doctors undergo 7-14 years of training after college making either no money, or near minimum wage at best during those years (sometimes working nearly 100 hrs per week and working up to 36 hours at a time). Many doctors don’t enter the workforce until their mid-30’s, and some require 20 years to pay their loans back. Combined with recent data showing doctors have low savings and retirement rates, the reality is that most are not actually as financially secure as the general public may believe.

The other point often discussed or glossed over is that most public employees are relatively well compensated and have a generous benefits package. No one would claim that teachers or firemen are rich (or over-compensated); in fact they perform honorable jobs, are under-appreciated, and should be recognized more for what they do! But in many public service jobs, employees receive better benefits (health insurance, pension plans, etc) than their colleagues in the private sector. In many cases, these benefits at least partially make up for the base salary differences.

Furthermore, PSLF can remove the personal responsibility aspect from borrowing and career choice. Stories abound of students choosing historically low income careers (hairstylist, photographer, etc) and racking up hundreds of thousands in student loans. Take for instance this example of a 33-year old waitress with $150,000 in student loans. Similarly, if a law student racks up $500,000 in loans getting through law school, and takes a public defender job paying less than $100,000, should taxpayers be on the hook for it? 

While these types of government programs are usually well-intentioned, they are ripe for abuse. Fly-by-night schools have been popping up everywhere to take advantage of the easily available student loan money, and existing schools are increasing tuition at astronomical rates. Some schools, such as Georgetown Law School, are blatantly abusing the system and using federal taxpayers to increase their coffers. Students are encouraged to maximize loan amounts, and it is hard to imagine that the promise of loan forgiveness doesn’t decrease their incentive to live frugilely during school.

What are your thoughts? Leave your comments below.


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