Tuesday, March 11, 2014

The President’s Baffling Student Loan Proposal by Aaron Taylor

I have long argued that once federal student loan debtors began to have their loan balances forgiven through the various income-based repayment options the whole narrative about student loans would change.  All of a sudden, student loan debtors would go from being hapless victims of an exploitive system to being crafty beneficiaries of an exploitable system.  It has been my prediction that this shift in narrative would result in political backlash against the forgiveness provisions that would result in a tightening of eligibility requirements—or the doing away with the provisions altogether.  

We have seen this type of overreaction before.  Up until the 1970s, student loan debt was dischargeable in bankruptcy to the same extent as other forms of unsecured debt.  But sensationalized stories about doctors and lawyers receiving discharges just before embarking on lucrative careers prompted Congress to impose increasingly onerous restrictions on the discharge of student loan debt.  And while the perceived impossibility of student loan discharge is overblown, there are undoubtedly debtors facing genuine hardships who are not afforded the benefit of a fresh start through bankruptcy, all because a few debtors abused the system. 

Unfortunately, the Obama Administration’s newly-released budget proposal appears intent on forestalling any media backlash about the forgiveness provisions.  One specific proposal calls for capping the eligibility for Public Service Loan Forgiveness (PSLF) at the maximum aggregate loan limit for independent undergraduate students—currently $57,500.  The effect of such a cap would be to essentially render graduate and professional school loans ineligible for forgiveness through the PSLF program.  

As it currently works, PSLF allows debtors who qualify for hardship, or income-based, payments to seek forgiveness of their student loan debts after making 120 monthly payments while employed in an eligible public or non-profit sector job.  The program was signed into law during the waning days of the George W. Bush presidency, as part of the College Cost Reduction Act.  The twin purposes of PSLF were 1) to provide relief for debtors struggling to make student loan payments and 2) to incentivize employment in the public and non-profit sectors, especially among those who may have more lucrative options in the private sector.  

There are no caps on the amount of debt that is eligible for forgiveness, a logical omission given the high cost of higher education.  But if the proposed changes are adopted, any amount above $57,500 would be subject to a 25-year window (300 monthly payments, with any forgiven amounts counted as income for the tax year in which they are forgiven).  This cap would render the program ineffective at serving either of its original purposes—especially for individuals with graduate and professional school debt.  

But once again, there is a theme here.  In 2011, the President signed a bill ending student loan interest subsidies for needy graduate and professional school students.  The ostensible reason was to shore up the need-based Pell Grant program, which was under fire by Republicans.  Unfortunately, this political compromise is costing the typical needy graduate or professional school student thousands of dollars in additional accrued interest—an absurd proposition when you consider that the federal government generated $66 billion in profit from student loan debtors between 2007 and 2012

The stated justification for capping PSLF is to keep schools from increasing tuition.  In other words, the Administration wants to punish students for the “sins” of their schools.  It seems that Georgetown Law School’s manipulation of its tuition rate to take full advantage of the PSLF program means that every student who pursues an educational path that ends up costing more than $57,500 will have to suffer.  This is a wrongheaded and patently unfair approach.

 There are perverse political forces lurking beneath the surface as well.  There has always been suspicion of the federal student aid program.  So "reforms" typically work against students.  Additionally, this Administration seems to believe that graduate and professional school students are undeserving of support and hardship relief.  The reality, however, is very different. 

Not every graduate and professional school student is a trust fund baby or destined for a lucrative career, especially not early on.  Many of these students struggle with the same types of hardships facing the neediest undergraduate students—and when it comes to student debt, these students are carrying the heaviest burdens.  In higher education, the vast majority of students must pay to play.  Unfortunately, the game is expensive—often much more than $57,500.  Moreover, when you consider that student loans are often the only means of financing education for individuals from poor backgrounds, the effect of this proposal would be most severe on those who already have the least.  

It is irresponsible to try to control college costs on the backs of students, not to mention baffling that this Administration would open budget negotiations with such a willingness to sacrifice needy students.  The budget proposal has been characterized as “dead on arrival” (largely because of its attempts to expand the social safety net in other areas); we should all hope that provisions such as the PSLF cap are not selectively resurrected.

http://lawprofessors.typepad.com/education_law/2014/03/the-presidents-baffling-student-loan-proposal-by-aaron-taylor.html

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Comments

I think your last paragraph brings up a really good point: it is pretty scary that Obama opened budget negotiations with such a concession. It does not bode well for the future of this program or for that matter, the middle class.

Posted by: Spanky McDoodle | Mar 11, 2014 5:56:32 AM

As the first commenter stated, this does not bode well. Another issue rarely, if ever, discussed regarding student loan forgiveness is the issue people in non-public service jobs face. Those of us with tremendous debts pay on them for 25 years, but when in an income based repayment program (which makes payments possible), the payments don't even cover interest. So at the end of 25 years of payments, the amount owed is much much more than the original balance. In that 25th year, the balance is forgiven. Good? Yes, but it's treated as taxable income in that year. So a person with $200,000 in loans may pay for 25 years and have an amount of about $400,000 or more forgiven, leaving that person with a catastrophic tax debt in that 25th year --- nearly no one will be able to pay that, which then means potentially that people who diligently pay for 25 years may then face serious consequences from the IRS for an inability to pay the tax. This is egregious.

Posted by: Anonymous | Apr 10, 2014 10:53:59 AM

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