The Pitfalls of Potentially Unlimited Student Loan Forgiveness

President Trump’s budget is aimed at cutting costs—and the Public Student Loan Forgiveness (PSLF) program could be eliminated after June 2018.  The Congressional Budget Office released a report earlier this month estimating that PSLF will cost tax payers $24 billion over the next ten years. 

The most generous version of PSLF, which was revamped in 2012 and contributed to the unforeseen costs PSLF is facing, offers unlimited federal loan forgiveness for borrowers who have worked in public service for ten years and have made 120 qualifying student loan payments.  Public service is defined broadly, and includes any type of government job, or any job at a 501(c)(3) nonprofit organization.  Estimates from the 6/7/2017 New York Times, show that a quarter of the nation’s workers, could conceivably be eligible for PSLF.

The concept of awarding student loan forgiveness for public service dates back to the 1950s, starting with President Dwight D. Eisenhower.  However, earlier forgiveness programs were much narrower and more limited in scope.  For example, under the Teacher Student Loan Forgiveness program, borrowers who teach for five consecutive years in a high poverty school, in a teaching shortage area such as special education, or secondary math or science, can qualify to receive up to $17,500 in loan forgiveness.  Borrowers who elect to borrow more in order to attend an out of state or private institution are not “rewarded” with larger amounts of loan forgiveness.  The maximum amount of loan forgiveness possible is capped at $17,500.

Part of the problem with PSLF is that it is so broad in scope, and many potential beneficiaries may not be working in low paying or shortage areas at all.  A radiologist working for a hospital (most hospitals qualify as 501(c)(3)s), could conceivably qualify for loan forgiveness under PSLF, despite the fact that there is no national shortage in radiology and radiology is one of the highest paid specialties in medicine.  The existence of PSLF may even encourage borrowers to take out larger student loans, and be more lackadaisical about paying them back.  After all, if borrowers believe they ultimately will not be required to pay back all the money that they have borrowed, why not?  Congress has the authority to end the PSLF program.