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Student-Loan Forgiveness Programs Encourage Borrowers to Take On More Debt, Report Says

Report: “Zero Marginal Cost: Measuring Subsidies for Graduate Education in the Public Service Loan Forgiveness Program”

Organization: New America Foundation

Authors: Jason Delisle, director of the foundation’s federal education budget project, and Alexander Holt, a policy analyst

Summary: The report examines the effects of two federal student-loan programs: income-based repayment, which allows borrowers to cap monthly payments at 10 percent of their annual income and have their debt forgiven after 20 years; and the Public Service Loan Forgiveness (PSLF) program, which allows borrowers working in the nonprofit sector to have their debt forgiven after 10 years.

The report sets forth hypothetical examples of borrowers in several professional fields to examine how much of their respective bills the government can end up footing under the programs. More specifically, the report tries to pinpoint how much debt graduates in certain fields can take on before they “bear no incremental cost in borrowing more.”

Bottom Line: The authors found that, in many cases, the level at which students participating in the programs can borrow more and be assured of no further cost to themselves is low relative to the cost of a degree.

“This will likely provide an incentive for graduate and professional students to borrow more rather than less, particularly for some professions,” the report states. “It should also make graduate students less sensitive to the price of a graduate or professional degree, allowing institutions to charge higher tuitions, especially for certain programs, like health care, social work, education, and government, where borrowers would go on to qualify for PSLF.”

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