Are We Forgiving Too Much Student-Loan Debt?

If you spend 10 years in public service, much of your student-loan debt will be forgiven. Should it be?

Are we forgiving too much student-loan debt? Some analysts and lawmakers think so.

Back in 2007, Congress made a simple promise to student-loan borrowers: Stick with a public-service career for 10 years, making monthly payments along the way, and we’ll forgive the rest of your debt.

Now, as the bill gets closer to coming due, a growing chorus of analysts and observers is asking: Was that the right promise to make?

At issue is a program known as Public Service Loan Forgiveness. The program, included in the College Cost Reduction and Access Act of 2007, is an attempt to fight two problems at once: ballooning student-loan debt and a scarcity of graduates serving the public good.

At least, that’s the thinking. And it’s been the thinking behind loan forgiveness for quite a while. Since 1958, when Congress created the first such program—to forgive the loan debts of teachers—lawmakers have offered loan forgiveness to people working in a wide variety of fields, including military-service members, doctors working on American Indian reservations, even large-animal veterinarians and U.S. Capitol police officers.

All told, there are about 30 other loan-forgiveness programs now on the books. Millions of dollars in debt are scrubbed each year, some by the federal government, some by states.

Tearful Testimony

The large number of participants in some programs—particularly for teachers and health professionals—may indicate that loan forgiveness encourages people to pursue those low-paying but valuable careers. An administrator of one such plan describes some participants as growing tearful when they speak of the impact loan forgiveness has had on their careers.

“I wish I could bring Congress to this and let them see that this is one program that they put in place that really is doing what they want,” says the administrator, who declines to be named because she is not authorized to speak for her agency.

But while advocates see Public Service Loan Forgiveness as an extension of that goal, others see a program with several loopholes—one that could allow borrowers to forgo dangerously large amounts of debt while leaving taxpayers to pick up the tab.

What’s different this time around? Much of the controversy comes down to two key features of the program, which will begin forgiving loans in 2017. First, unlike its predecessors, it puts no cap on how much money can be forgiven. Second, its broader eligibility requirements could make forgiveness available to more people, in more jobs, than ever before.

Those features mean the plan could have a wide impact on legions of borrowers struggling with the burdens of student-loan debt. But they also raise questions about whether the program can be exploited.

With the first wave of payouts bearing down, lawmakers, think tanks, and even President Obama have recommended significant modifications. Their suggestions have stoked a broader question: What, exactly, is loan forgiveness meant to achieve?

To Cap or Not to Cap?

Much of the concern about Public Service Loan Forgiveness stems from a single source: the New America Foundation, a nonprofit public-policy institute that has been raising alarms about the program since 2012.

And on New America’s list of fears, the lack of a cap looms large. Nearly all other existing programs restrict the amount that can be forgiven—often holding it to around $40,000 to $60,000 total, sometimes less.

If the government doesn’t cap how much debt can be wiped clean, the group argues, the new program could simply encourage borrowers to take on unmanageable debt levels.

Overborrowing is a problem for everyone, not just the borrower, says Jason Delisle, a policy analyst at New America, because it could drive the cost of college further upward. “Public Service Loan Forgiveness tells the colleges, Yes, you can charge 60 grand, and tells the student, Yeah, you can borrow 60 grand.”

New America’s predictions have had a far-reaching impact. In March, President Obama, traditionally a proponent of expanding federal programs that would reduce student debt, took a step back. His 2015 budget proposal includes a plan to limit the amount of individual debt forgiven under the public-service program to $57,500, which is the current limit that financially independent undergraduates can take out in federal loans.

Some student-loan administrators share the president’s concern.

“There’s a moral hazard for the student—whether it’s degree-hopping or whether it’s going too far into debt for any single program,” says Justin Draeger, president of the National Association of Student Financial Aid Administrators.

In a recent report, the group also recommended limiting forgiveness to the $57,500 level. But it suggested that borrowers also have half of any additional loan debt forgiven, up to a total of $138,500.

Mr. Obama’s proposed cap has yet to be reviewed by lawmakers. But it has already raised its own set of concerns—chief among them that adding a cap amounts to neutering the program.

“Do we need to have some safeguards to prevent overborrowing?” asks David A. Bergeron, vice president for postsecondary education at the Center for American Progress, a public-policy group. “Maybe—but we’re a little early in that process to make that determination.”

Mr. Bergeron, a former Education Department official, points out that the cost of Public Service Loan Forgiveness is built into the government’s loan program. Essentially, he says, the profits from other borrowers who go into default or forbearance on their federal loans subsidize loan forgiveness.

It’s difficult to assess how the lack of a cap will affect the new program, especially because it requires a much longer public-service commitment than most others of its kind. But a closer look at earlier loan-forgiveness programs serves as a reminder that not everyone takes advantage of the full benefits.

For example, the Government Employee Student Loan Repayment Program allows employees of nearly any federal agency to have up to $10,000 forgiven each year, up to a maximum of $60,000. In 2012, $70.3-million in debt was forgiven for 10,543 employees who participated. That works out to an average of $6,670 per person, about two-thirds of the amount available.

Who Counts as a Public Servant?

The new loan-forgiveness program covers several jobs traditionally thought of as rooted in public service—teacher, public defender, social worker, nurse. But the program also offers forgiveness to anyone working at tax-exempt nonprofit organizations for 10 years. That could open up forgiveness to policy analysts or public-relations officials, for example.

Analysts at New America think that might be a loophole. Here’s how that would work, according to Mr. Delisle. A borrower’s monthly loan payments would be based on his or her income, not on the amount of debt he or she had incurred. If someone gets an expensive degree and then enters into a low-paying job, the gap between the debt paid and the debt forgiven after 10 years can grow wide.

In one example presented by New America, a nurse who owes $75,000 in debt would make regular payments amounting to $36,000 in total over 10 years. Factor in high interest rates, and that nurse could end up with $67,000 in forgiven loans.

The think tank argues that it’s a real problem when that kind of money is spent to subsidize career choices that don’t seem underrepresented or vital to the public.

Analysts at New America have frequently singled out Georgetown University’s law school, which informs its students about the loan-forgiveness plan as part of its routine financial-aid counseling, as an example. Too many law students—who have among the largest amounts of debt of any student group—could take advantage of the program, New America says, because the expansive list of eligible jobs now goes beyond traditional public-service roles like public defenders or county prosecutors.

Charles W. Pruett, assistant dean for financial aid at Georgetown’s law school, rejects the charge that Georgetown is exploiting the program as a backdoor way to offer a “free” education. The 10-year public-service commitment is too onerous to appeal to on-the-fence students, he says, and the program requires participants to continue to make loan payments over those 10 years anyway.

Rohit Chopra, student-loan ombudsman at the federal government’s Consumer Financial Protection Bureau, thinks it’s premature to worry about stretching the meaning of public service. “If borrowers had a crystal ball as to who their employers would be—yeah, they would likely be able to figure out how much income” they could have forgiven, Mr. Chopra says. As it stands, he says, that’s a very difficult calculation to make.

What Is Forgiveness Really For?

The debates over policy point to a larger question about loan forgiveness: What problem is it trying to solve? The answer depends on whom you ask.

For Mr. Delisle, the goal of federal spending on higher education should be improving college access. In that sense, he says, loan-forgiveness programs are problematic because they often benefit people who have borrowed in pursuit of advanced degrees.

“You’re subsidizing people who already have college degrees,” he says. “I think you’re just asking too much of the student-loan program. It’s supposed to help people go to school, and then help people who stumble.”

But others point out that graduate credentials are often required to pursue certain fields. Capping the amount of funding, they say, leaves in the lurch low-income students who aspire to fields like social work or teaching.

“The people that go into social work go into it knowing that they’re not going to be rich,” says Mark Kantrowitz, a financial-aid consultant. Loan forgiveness, he says, can be “the difference between knowing you can take care of your family or not.”

Curtailing the program, Mr. Pruett says, could send a dangerous message: “that you have to be wealthy to pursue these types of jobs.”

Some students say they worry about just that.

Matt A. McCune, a graduate student in physics at the University of Missouri at Columbia, says that, compared with many graduate students, he considers himself lucky. He has less than a third of the debt of an average graduate student, and he and his wife hope to pay off their student loans within the next several years.

Mr. McCune earned his bachelor’s degree at 27 after attending part time while working as a night manager at Lowe’s. He describes himself as coming from a “relatively well-off background,” but he depended on Pell Grants to complete his bachelor’s degree.

Now, as he turns 36 with two years still remaining until he expects to earn his Ph.D., Mr. McCune says he is keeping his options open. “I’m interested in a job in a national lab, in industry, in policy,” he says.

Would loan forgiveness tip the scales toward a career in public service? Not if the future of the program is in doubt, he says: “I don’t think anybody can really take a job and assume this loan-forgiveness program can be there in 10 years.”

“People are out there claiming that graduate students are out there overspending and overborrowing, but I don’t know any of these people,” he says. “I don’t know anybody who graduates and says, ‘It’s only 10 or 20 years until my loans are forgiven.’”