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Fixes Needed for Federal Program Promoting Public Service
In 2007, Congress created two new programs aimed at making it easier for students to repay their federal student loans and encouraging them to pursue careers in the public service. As we wrote yesterday, one of those programs -- Income-Based Repayment -- goes into effect today. The other one -- Public Service Loan Forgiveness -- is already up and running but may not live up to its full potential unless changes are made to the regulations governing it.
Under the loan forgiveness program, which Congress included in the College Cost Reduction and Access Act, the federal government will forgive the remaining debt of Direct Student Loan borrowers who have made 120 payments on their loans while working in a public service occupation. Borrowers with loans through the Federal Family Education Loan (FFEL) program can take advantage of this benefit by consolidating their debt into Direct Lending.
Lawmakers created the program in reaction to reports that student loan borrowers were increasingly shying away from pursuing public-service careers, such as teaching and social work, because of their heavy debt loads. By providing loan forgiveness, the bill's authors hoped to provide incentives to college graduates to enter these fields and reward them for their service.
Sounds pretty straightforward, right? Unfortunately, the program is not operating in the way lawmakers envisioned. That's because the U.S. Department of Education, under its previous leadership, decided to keep people in the dark about whether their chosen jobs qualify them for the benefit. Under regulations the Department issued in October, student loan borrowers will not know whether they qualify for the loan forgiveness until after they have made all 120 required payments.
Last year, at Higher Ed Watch, we questioned the Department's decision -- asking why borrowers working at low-paying jobs should have to face this type of uncertainty. We joined the Project on Student Debt in calling for the Department to develop a system that allows borrowers to confirm and track their eligibility over time for this benefit. But Department officials refused to budge, saying that tracking borrowers' eligibility status would be "a costly and complex" undertaking. Maybe so, but doesn't the Department have the obligation to carry out the will of Congress?
Now that there are new leaders at the Department, we would hope that they would revisit this regulation. They should make it a topic of the negotiated rulemaking sessions they plan to hold in the fall.
Our friends at the Institute for College Access and Success (TICAS), which runs the Project on Student Debt, have asked the Department to revise the rule to allow borrowers who have made at least 12 payments on their loans "request a confirmation of eligible payments and employment on a form provided by the [Education] Secretary." [Disclosure: Higher Ed Watchis supported in part by TICAS.
"Giving borrowers clear information upfront, and periodic confirmation of how many more years of eligible work and payments are required before they qualify for forgiveness, will provide an incentive to continue in public service and ultimately meet the forgiveness requirements," Pauline Abernathy, the acting director of policy and strategy at TICAS, recently wrote in testimony she provided the Department. "It will also reduce the number of borrowers applying to the Department for loan forgiveness before it is appropriate for them to do so."
We wholeheartedly agree. Borrowers who devote themselves to public service should not be left in the dark about whether they qualify for help from this worthy program.
They should also be told about the taxes
Will they be taxed on the amount forgiven? Need to know way ahead of time. Is this a guaranteed program? They did change previous contracts retroactively. And the economy could take a turn for the worse.
Well, well, well, looks
Well, well, well, looks like the scholars at the NAF are frustrated again that their utopian dreams for the Direct Loan Program aren't being realized. Therefore, they bless us with another incongruous posting! The old economic axioms of you get what you pay for and money doesn't grow on trees mean nothing to the scholars at the NAF! Tell us NAF, how will the Direct Loan Program maintain its highly-touted administrative-cost advantage versus FFELP if it has to start paying for things like advertising and tracking the public-forgiveness program? (Thanks to your intrepid reporting, we all know that the Direct Loan Program is a well-oiled, no-frills, highly-efficient machine--superior in every way to poor FFELP!) Sounds like a case of you can't have your cake and eat it too if you ask me! Kinda like making college more "affordable" by shifting the burden of tuition-inflated student-loan debt to the taxpayer through income-based repayment and forgiveness schemes! Marvelous solutions these are until the US treasury is empty and our economy in ruins due to such runaway spending!
How about those public-service jobs anyway? You know, I was just reading an article today that highlighted the fact that many of those public-service jobs pay more than their counterparts in the private sector. Strange that we need to take taxpayer dollars and send them to people making more than many in the private sector. Could it be that the public-service forgiveness program is just another sop from Congress to an ideologically sympathetic and organized voting bloc? No way--not our Congress! Thanks for another laugh NAF! Nobody does it better!
These programs are no substitute for consumer protection
Both IBR, and Public Service forgiveness programs have merit for relatively young borrowers (i.e. still in school, or recent graduates) who take on a large amount of debt, and earn low wages...particularly those who work in the public sector. However, it is not the "be-all, end-all", and certainly doesn't substitute for standard consumer protections. In fact, there are some very serious risks and adversities associated with these programs that need to be considered seriously:
1. Leaving borrowers hanging regarding eligibility after going through all the trouble to sign up smacks of bad faith, and really brings into question the likely actions of the Department "when no one is looking". My gut tells me that it will find clever, unobvious methods of kicking people out of the program at the most inopportune times for the borrowers, that is, and other tricks for separating the borrowers from as much wealth as possible.
2. Even if they function as advertised, for borrowers with high debt/low income taking part in the programs, their balance will increase significantly during the life of the loan. This will impact their debt/income ratio, and in general will weigh increasingly heavily on the mind of the borrower.
3. If for whatever reason the borrower drops out of the program- particularly towards the end of the term- , they will be hit with this extremely large debt. If they were to default, then this would be an astronomical amount.
4. If the borrower should experience financial fortune during this period (particularly towards the end of the period), the borrower will be compelled to use it as a part of the IBR...so in a sense, it essentially guarantees financial medicority through the life of the repayment. This tends to dampen ones ambition, and desire to take risks.
5. For borrowers already saddled with defaulted loans that are massively inflated with fees and interest above the original amount borrowed, these programs are not attractive. Both would force defaulted borrowers to "rehabilitate” their loans, which requires signing a new promissory note that legitimizes the vastly inflated debt. Many defaulted borrowers have already paid far more than originally borrowed, and these programs do nothing to address that. Also, many defaulted borrowers have- for years- already suffered massive losses- monetary and non monetary, and the thought of a 10, or 25 year repayment program is not only unpleasant; in the absence of standard consumer protections that would allow for a relatively swift and straightforward resolution (like for IRS debt, credit card debt, or any other type of debt), these programs are, frankly, insulting. Particularly for older borrowers who look forward a time in their life without the stress associated with intractable student loan debt.
6. 10 years is a long time. 25 years is an eternity. Congress took away bankruptcy protections from student loans mid-stream...one can imagine the multitude of ways that this program could be tweaked over time to benefit the Feds as opposed to the borrowers. 501(c)(3) status could be revoked en masse at some point. the poverty level could be dramatically changed, etc, etc. These and many other factors could make the program fail, or greatly reduce its attractiveness over the life of the loan.
Couple of general thoughts:
1. In general, all of this discussion only begs the question: Why is college so expensive that we need these programs in the first place?
2. These programs smack of population control...sort of a "soft, involuntary servitude". The citizens have no control over the cost of education, and little control over how much they have to borrower to get through school, so many are locked into decades of lifestyle choices dictated greatly by this debt...This is a damper on happiness, freedom, self determination, and a new stress on a large segment of the population that could be easily avoided with rational pricing, and standard consumer protections. We must not lose sight of the fact that given the public benefit of education, student loans should have more consumer protections than other loans. Not less.
3. These programs will, as a practical matter, serve as an excuse for Congress not to return much needed consumer protections to the student loan industry. This will only guaranty the perpetuation of horrible lending practices, bad oversite, continued inflation, increased debt, and a host of other systemic flaws that need to be addressed immediately.
Public service loan forgiveness
Good point about the danger that the terms of these contracts will change for the worse due to Congressional action during the long repayment period. Note, for example, that Congress recently eliminated The Child Care Provider Loan Forgiveness Program entirely before anyone was able to take advantage of it.
The most important difference between ICRPs and IBRPs is that ICRPs are Federal Direct loans and IBRPs are made by private lenders under government guarantee. The advantages to student loan borrowers if the IBRPs work as promised are modest but the advantages to the lending industry are huge, especially if the lending industry further manipulates things in its favor. This difference, which gets glossed over, cannot be overemphasized.
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