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Manhattan Institute

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It's Time to Axe Student Loan Forgiveness for Public Service

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It's Time to Axe Student Loan Forgiveness for Public Service

The Hill June 22, 2017
EducationHigher Ed

Among the many controversial proposals in the budget released by the Trump administration last month was the elimination of Public Service Loan Forgiveness, a program that forgives student loans for those who maintain 10 years of employment in the government or nonprofit sectors. While a tough sell, Congress would be taking a big step in the right direction by cutting the program.

The PSLF program was created in 2007, under the Bush administration, to encourage more college graduates to pursue careers in public service such as teaching and social work. The program allowed borrowers in the government and nonprofit sectors to have their entire federal student loan balance forgiven after just 10 years of payments, half that required of borrowers in the for-profit sector who participate in the most generous income driven repayment plan currently available.

But there’s a big problem with PSLF. Not only does it poorly target subsidies to where they are needed, it also creates perverse incentives that run up the bill for taxpayers.

When students expect to pay back their debt  they take out as little as is necessary. But once they anticipate being eligible for loan forgiveness, each additional dollar of borrowing is essentially free—they’ll never pay it back. This encourages students to attend higher cost institutions and live more luxuriously than they would have otherwise. And the lack of limits on graduate borrowing means that the pot of free money available to these borrowers, at the expense of taxpayers, is essentially limitless.

Even if not all borrowers are savvy enough to game the system in this way, it seems that institutions are. Some, like Georgetown Law, have even institutionalized this practice.

Supporters of PSLF are quick to point out that there are instances where under subscription to certain professions is negatively impacting social welfare and can justify expenditure of taxpayer dollars. And they are certainly right. But they are wrong to think that PSLF is the right way to go about it.  

For example, it wouldn’t be hard to argue that taxpayer dollars should be spent to ensure that teaching and social work positions in every jurisdiction are adequately staffed. But it would be much more difficult to make a case that taxpayers should be further subsidizing the compensation of Supreme Court clerks—a highly sought-after and well-compensated position for young lawyers—would also make sense in this framework. The problem with PSLF is that it treats both of these cases the same way.

The exclusion of private sector workers is also problematic. Despite the fact that private, nonprofit, and government enterprises often offer similar services to the communities they serve (i.e. hospitals, prisons), PSLF excludes workers at the private enterprises from eligibility for loan forgiveness subsidies.

Another problem with using PSLF to encourage public service is that college graduates who have small or modest debt balances don’t stand to gain anything from the program. This means that PSLF only creates an incentive for individuals with large student debt balances to enter public service. If the problem we’re trying to solve is under-subscription to certain professions, then we should subsidize the compensation of all individuals who enter that profession, not just those with high balances.

Furthermore, those who benefit from PSLF will benefit in proportion to the amount they’ve borrowed. An individual who attended a public institution will receive less from PSLF from an individual in the same profession who attended a high cost institution. It’s tough to argue that is an equitable allocation of benefits, especially since students who attend higher cost institutions tend to come from more well-off families. 

Using taxpayer dollars to pay for subsidies that help fill vacancies in professions that are critical for public welfare is not a bad idea. But delivering those subsidies through PSLF is. Subsidies should be delivered through alternative mechanisms, like wage subsidies or tax benefits, which would allow them to be better targeted and more effective at incentivizing changes in behavior. Making the allocation of subsidies transparent in this way would save taxpayer dollars due to greater efficiency and would create accountability for policy makers to ensure that subsidies are actually being delivered to where they are needed and not simply padding the pockets of constituents. 

The Trump administration is right; it’s time to get subsidies for public service out of the student lending program.

This piece originally appeared at The Hill

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Beth Akers is a senior fellow at the Manhattan Institute and coauthor of "Game of Loans: The Rhetoric and Reality of Student Debt."

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