The “Unintended” Consequences of Student Loan Forgiveness

Michael Lux Blog, News, Student Loans 18 Comments

The subject of student loan forgiveness and elimination of student debt is a frequent conversation on this website.  When this topic arises my focus has always been on helping people deal with their student loans, updating readers on the latest news in student loans, and providing a venue for people to vent about their student loans.  My goal has always been to stick to the facts and let people reach their own conclusions.

However, I occasionally find myself compelled to add my two cents to the discussion…

Yesterday the San Fransisco Chronicle published an article about the unintended consequences of public service student loan forgiveness.  The article specified how people with professional degrees (i.e. Doctors and Lawyers) would benefit most from these programs.  The author went on to give a couple examples and conclude that many students might have an interest in taking out more loans than they need because they know it will be forgiven.

First, let’s all get on the same page about public service student loan forgiveness.  The only way to qualify for this program is to work a total of 10 years for a government or public service institution.  During this time you must make timely payments on your student loans and the minimum you will be expected to pay will be 10 to 15 percent of your income, depending upon when you graduated.  This is not a summer helping out the local YMCA, this is a major long term commitment.

The Chronicle theorizes that as word spreads about these programs, people will take on higher student loan debt with the aim of forgiveness.  The logic in this train of thought is lost on me.  First of all, in order for a student to concoct a plan to maximize student loans forgiven, they would need to have a fairly sophisticated understanding of student loan rules.  Anybody with any student loan familiarity, knows the onerous burden that this debt presents.  Why would someone take out additional unnecessary debt for the chance to possibly have it forgiven in 10 years?  Why take that risk?

The intended consequence of the public service student loan forgiveness program is to encourage people to do work that serves the public interest.  This is exactly what the plan does.  I have personally observed how finding government work has become more competitive, despite the fact that it pays significantly less than the private sector.  As a nation do we not want our best and brightest working on our behalf?

While I admittedly have some bias about this program, I sincerely believe that my personal career decisions demonstrate the value of public service forgiveness.  Service to the community has been a value that has been engrained upon me since my time in the Boy Scouts.  As a professional, I now make a living serving the community.  Absent this program, I would be in an entirely different position.  My student loans would preclude me from worrying about anyone other than myself and my finances.

My experience is that public service loan forgiveness is not some government handout.  Instead it is a means to provide an opportunity for civic minded people to serve their country.

Even if the fear of people taking out extra government loans persists, one fact should not be lost.  No matter what, borrowers are repaying their debt.  Either they will be making a long term commitment to the public or they will be paying back their loans plus interest.

  • I didn’t read the SF Chronicle article, but I’ve got to agree with you. I mean, I suppose if students knew they would end up getting loan forgiveness, they might not be as prudent as they originally were. That’s a big “if” though. First, how does one know for sure they’ll land a government job? Second, what are they going to do with extra student loans? Go on a shopping spree or travel the world? You can’t do that with student loan proceeds anyway.

    • You are right on… it just wouldn’t make sense. I hope common sense prevails on this issue.

  • Untemplater

    Working 10 years for a government or public service institution is hard to do. Most people switch jobs after just 1-3 years!

  • I really need to revisit this question and look into this more. I just read the article from SF Chronicle where it said students with large debt loads could have some forgiven even if they end up making more than $100,000 per year. When I did the calculation, it didn’t seem likely that that would be the case. The artice says:
    “To qualify for forgiveness, you must make 120 on-time monthly payments while working in public service, under either a standard 10-year repayment plan or one of the government’s income-linked payment plans.” If you were to use a standard 10-year repayment plan…wouldn’t your debt be paid off? As for income-linked payment plans, I would think that with an over $100,000 income that you’d be required to make payments where in 10 years, your debt will probably be paid off (unless your debt was extremely large). But I thought only federal student loans qualify so the max is $18,500 a year so even with 4 years of law school (part time), you would accumulate only $74,000 in student loans.

    • Most of what you are saying is correct Andrew. If you are on the 10 year repayment plan you will not have any debt forgiven. However, you can generate debt of >$100,000 in federal student loans. The graduate school limits are much higher than undergrad limits, and remember, there is more than just the stafford loans. Graduate Plus loans (note: NOT parent plus loans) can also qualify for this program.

    • I worked in the federal government for 3 years and state for 8 years now. The pension is a bit of a golden handcuff. Another thing that I forgot to add was that when I used the IBR calculator, I had to include my wife’s income…while she doesn’t make much, our combined income made it where it didn’t make sense. I guess we could always file married filing separately but then there’d be tax consequences.

    • Being married to a spouse who doesn’t have student loans can really wreck havoc on IBR calculations.

  • Student Debt Survivor

    I think student loan forgiveness is a good idea for a very small number of people. Working 10 years in a underserved area or a government job is a really long time. I’d hate to think I was “tied” to a job I hated just because I had 5 or 6 years “in” and was trapped by the loan forgiveness program. Better to get a high paying job, live on nothing and pay them down aggressively in my opinion. But to each his/her own.

    • Great point! For most people this program is not the best choice. It really is best for the people who are willing to take less money to work in public service.

  • Your Daily Finance

    I haven’t kept any job for more than 3-5 years. I find that it would probably not be in my best interest for a program like this. Unless I have a misunderstanding you would need to keep the same public service job and that to me would be like trapping a mouse in a cage. What if better opportunities come along? What if you are not happy? The program has its benefits but is definitely not for everyone.

    • You are not required to keep the same job for the entire 10 years… it just needs to be a public service job, so you are allowed to go from one job to another.

  • “No matter what, borrowers are repaying their debt.”. That’s a really important point for people to keep in mind. Either you’re sacrificing salary or you’re paying your debts back in full. There is no free way to go about it. I do think there’s probably some possibility of people hearing just enough to know about loan forgiveness but not enough about the details to non-chalantly take out more in loans. But I think that’s probably the small minority and not a reason to kill the program, if that’s what they’re suggesting.

    • Well said. I think there is definitely the temptation to portray this program as a government handout, as evidenced by this article. The reality, as you point out, is much different.

  • Laura

    I spent $25K to get a masters in school counseling and can’t find a job to save my life. With an undergrad degree in Psych and a graduate degree in counseling, it’s obvious I want to have a career in helping others. With that being said, I am going to apply for a federally funded grant program that will pay for an MSW in return for a 2-year commitment working for a government entity. It’s a win-win…I get my education paid for and have a job straight out of school! Along with that, I will make my 10 years of payments while working as a social worker and then apply for loan forgiveness. Am I taking advantage of the system? No…because I will due my due diligence as a public service worker as well as make my 120 payments. I feel that by then, with the best of intentions, I will have earned the option to have my loans forgiven.

    • Very cool! I really appreciate your outlook on the entire thing. The MSW grant program sounds like a fantastic. Getting the degree you want AND the job you want definitely is a win-win.

  • The problem with student loans is the fact that they shouldn’t be made in the first place by government. They are what cause the rising cost in education. With all the improvement in technology and the fact that schools can now teach more people on the internet with little marginal cost, don’t people wonder why the price of education isn’t going down instead of up?

    Student loans help enrich the schools while screwing over the students. Universities don’t have to figure out how to make their product affordable to obtain customers. They know they can raise tuition as much as they want because the government will give them whatever money they’re asking for.

    Furthermore, student loans cause many students to go into fields where they won’t be able to get jobs. I wrote an article about this with more detailed information here: http://www.truthinexile.com/student-loan-bubble/

  • The problem with student loans is the fact that they shouldn’t be made in the first place by government. They are what cause the rising cost in education. With all the improvement in technology and the fact that schools can now teach more people on the internet with little marginal cost, don’t people wonder why the price of education isn’t going down instead of up?

    Student loans help enrich the schools while screwing over the students. Universities don’t have to figure out how to make their product affordable to obtain customers. They know they can raise tuition as much as they want because the government will give them whatever money they’re asking for.

    Furthermore, student loans cause many students to go into fields where they won’t be able to get jobs. I wrote an article about this with more detailed information here: http://www.truthinexile.com/student-loan-bubble/