Don’t Pull the Rug Out from Under PSLF Recipients

Earlier this month, EPI released its annual “Class of 2014” paper, which examines labor market trends for recent high school and college graduates. Among other trends, authors Heidi Shierholz, Alyssa Davis and Will Kimball highlight the problems recent graduates face when they graduate with high levels of student debt. Student debt continues to be one of the biggest reasons young people postpone major purchases like cars and houses, and repayment can be difficult if students can’t secure their first job after graduation. Congress’s past failures to keep interest rates on student debt low, let alone provide a comprehensive refinancing plan (although that could change with Senator Warren’s new bill), should be cause for concern for recent college graduates.

President Obama’s 2015 budget proposal, released in March, makes college affordability a priority by broadening the scope of the Pay as You Earn (PAYE) repayment program to all student borrowers. Currently, for qualifying students, PAYE allows high-debt, low-income students to pay a lower monthly payment (10 percent of their income) than the standard 10-year repayment plan requires, and provides total loan forgiveness to graduates after 20 years of qualifying repayments.  The administration proposed expanding the program to all students beginning July 2015 and making it the only income based repayment option, providing access to affordable repayment options for all student s and simplifying the repayment experience.

While additional reforms proposed to PAYE (page 13 here) seem common sense (eliminating caps for high-income borrowers and calculating payments for married couples using combined household adjusted gross income instead of calculating payments separately), part of the budgetary cost of this expansion is recouped by capping loan forgiveness on a subset of the PAYE repayment program, graduates enrolled in the Federal Public Service Loan Forgiveness program (PSLF).

PSLF is designed to encourage students to work in public service jobs after graduating, by easing the burden of debt repayment. Participating students have their remaining balance of student loans forgiven after they make 120 qualifying payments (payments are 10% of income) and remain employed full time by certain public service employers such as any federal, state, or local government office, 501(c)(3) nonprofits, or public school systems.

Currently, PSLF provides unlimited forgiveness for any federal direct loans (the only government student loan type offered as of July 2010) after students make their qualifying payments. However, the president’s 2015 budget proposal caps the total amount of loan forgiveness for undergraduate and graduate loans at $57,500. This could well discourage many smart and qualified individuals from using their advanced degree to enter public service. Among those the cap doesn’t outright deter from entering public service, it is sure to increase their debt burden.

Most concerning, the provision makes no mention of grandfathering anyone into the original PSLF terms, including students who signed up for the program when it launched in 2007 and still haven’t seen any relief from loan repayment (the first year of total loan forgiveness would be 2017). Graduates who were counting on PSLF forgiveness will have to readjust to unanticipated debt, either by putting off saving for larger assets, or moving into a more lucrative field of work to pay back loans—the exact opposite of what the PSLF was intended for.

How much the cap will harm students and recent graduates will vary by the amount of debt each student takes on. Take the example of an incoming law student, who takes on the median amount of law school debt, and hopes to work as a public defender. The median student debt for students graduating from law school is around $110,000, but can range from as high as $180,000 at some private schools to as low as $35,000 in some public schools. Meanwhile, the median entry salary for a recent law school graduate going to work at a public defender’s office is $50,500; with 11-15 years of experience the median rises to $78,600. We can do some simple math with a loan calculator to show that under the current PSLF loan provision, if a law school graduate starts work with the median amount of law school debt and begins at a salary of $50,500, by the end of 10 years, he or she would only pay $64,272 ($63,638 in interest alone) before receiving total loan forgiveness. Under the administration’s PAYE proposal, the law student would be paying back loans for an additional 15 years—$244,217 over the 25 year period before total forgiveness sets in.

This seems like a pretty extreme cutback to the generosity of a program that is already not generous enough to attract huge numbers of students—the dean of Georgetown law school points out that 90 percent of students entering Georgetown law are not using the PSLF program.

It is encouraging to see President Obama take the reins to introduce and advocate for policy that makes debt repayment cheaper for the vast majority of graduates. However, to pull the rug out from a small subset of students who have decided to spend 10 years of their life in public service signals that the incentives in the higher education market are still skewed. This wouldn’t be a problem if, for example, median debt for graduates was lower in the first place. President Obama would do well to tackle the culprit of high student debt—high tuition—before cutting off repayment reprieve.