This commentary originally appeared in Forbes on May 30, 2017.
President Trump’s first budget has been submitted to Congress. It would enact a number of changes in higher education policy: eliminating the taxpayer subsidy for low-income students’ loan interest payments while enrolled in school; raising the limit on borrowers’ payments under the Income-Driven Repayment program from its current 10 percent of monthly income to 12.5 percent; and reducing the number of years that these borrowers must pay the 12.5 percent monthly charge from 20 to 15 years, after which the remainder of undergraduates’ loans would be forgiven. Graduate student borrowers would be required to continue paying no less than 12.5 percent of their monthly income for 30 years, rather than the current 25.
Finally, the Trump budget would eliminate the Public Service Loan Forgiveness Plan (PSLF), a well-intentioned but counterproductive initiative of the past two administrations (George W. Bush and Barack Obama). While all of these reforms are controversial, abolition of the PSLF could prove to be the most contentious.
Signed into law in 2007 by Bush, the PSLF program makes it possible for federal student loan borrowers to have their debts forgiven after ten years of repayment—provided that said borrowers work during those years for the government or a nonprofit organization.
The motivation behind the PSLF program is to make it easier for student loan borrowers to go into low-paying careers that nonetheless are deemed essential to society as a whole. Such borrowers had often struggled to pay back their student loans on the lower salaries paid by these professions.
According to one estimate, roughly half a million borrowers are currently in line to receive loan forgiveness under PSLF. These borrowers likely need not worry if the president’s proposal becomes law. The proposed abolition of PSLF would apply only to those whose loans are taken out after June 30, 2018. This stipulation, as well as the politics of the situation, indicates that these prior PSLF borrowers would be grandfathered in under the new law.
The Trump budget estimates that eliminating PSLF for future borrowers will save federal taxpayers $27 billion over the next ten years. This measure, like all of the proposed budget’s higher education reforms, aims at reducing the tuition charged by colleges through restoring some market-based incentives and returning more authority for higher education to the states.
Commenting on Trump’s higher education budget, a representative of the left-wing think tank, Demos, complained that the proposal “doesn’t do anything to address the root problems of college affordability and of rising student debt.”
Although I would agree that more can be done to salvage higher education, abolition of the PLSF program is nonetheless one indispensable step toward addressing the root problems of affordability and debt. Why? Because the affordability and debt crises are due to federal policy. As I recounted here, in 2013, the Washington Post exposed Georgetown University Law School’s gaming of the current student loan system to allow it to raise its students’ tuitions at the taxpayers’ expense. Manipulating the “Income-Based Repayment Plan” (an Obama initiative, which would be reduced under Trump’s budget), Georgetown counsels its law students who go on to work for the government or a non-profit entity on how to avoid (be “forgiven” for) tens of thousands of dollars of student-loan debt. Who picks up the bill for these college elites? The taxpayers. The result? According to the Post report, “the federal government . . . [is] paying almost $160,000 to students at an elite law school.”
I recount Georgetown’s artful dodge less to bash the school and more to reaffirm a simple truth of economics: incentives work, but not always in the way government planners expect. Missed by the crafters of PSLF is the fact that, though they sought only to incentivize students to go into government or nonprofit work, the unintended consequence was to simultaneously incentivize wealthy universities to advertise the ways in which the new federal program could help their elite graduates pass significant portions of their debt on to hapless taxpayers.
Another economic truth missed by the designers of PSLF is that, when government subsidizes something, you should always expect it to grow. This has been seen with the entire system of federal student loans over the past several decades. Then-U.S. Secretary of Education, William Bennett, saw it thirty years ago, when he first offered what has come to be called the “Bennett Hypothesis.” In 1987, Bennett penned an op ed in The New York Times titled, “Our Greedy Colleges.” There, he asserted that “increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.”
And what an increase it has cushioned! In the three decades following Bennett’s prediction, average college tuitions nationwide have increased 440 percent, and student-loan debt now stands at $1.5 trillion. A 2015 study by the Federal Reserve Bank of New York removed any doubt concerning the accuracy of Bennett’s analysis. It found that every new dollar of Pell Grants or subsidized student loans results in universities raising tuitions between 55 and 65 cents. What does this mean? It means that a good deal of the higher education dollars supplied by American taxpayers are not going to students. The bulk is going to the universities, which continue “blithely to raise their tuitions.”
As bad as this is, the true extent of the crisis was hidden by a sizable Obama administration blunder. As I reported here in January, “for the last eight years, the American people have not been told the whole story about just how bad the student-loan default crisis really is.” According to a Wall Street Journal report, just as President Obama was leaving office, his Department of Education released a memorandum admitting that it had “overstated student loan repayment rates at most colleges and trade schools.” The “updated numbers” provided by the Department were analyzed by the Journal’s staff, who found that “the Department previously had inflated the repayment rates for 99.8% of all colleges and trade schools in the country.” The new data show that “at more than 1,000 colleges and trade schools, or about a quarter of the total, at least half the students had defaulted or failed to pay down at least $1 on their debt within seven years.”
These troubling numbers cry out for a solution, a key element of which is abolishing PSLF. Although the program aims to prevent the growth of “debt slaves,” it does the opposite. The only sustainable way to reduce student indebtedness is to go to the root problem—the tuition hyperinflation that forces students to encumber themselves at greater and greater expense for longer and longer periods. Like federally subsidized student loans and Income-Driven Repayment, the PSLF program strays too far from market-based decision making and thus skews the demand curve. Abolition of PSLF would restore some semblance of market discipline in this area.
Abolishing PSLF is a good first step for the new administration to take. Whether the U.S. Congress agrees remains to be seen.