Education / Schools, Federal Government, Law Schools, Money, Public Interest, Student Loans

Changes To Government Loan Forgiveness That Totally Miss The Mark

Whenever the government gets involved with “helping” students suffering under crushing debt obligations, I wonder if “the government” even partially understands how students think.

There is a new proposal in the budget that would bring significant changes to the student loan forgiveness program. Specifically, the “Public Sector Loan Forgiveness” program. Currently, students with massive amounts of debt can sign up for income-based repayment of their student loans. Their payments are capped at 10% of “discretionary” income. If they work in the public sector or for a designated non-profit, the government forgives the rest of their loans after ten years. For those playing along at home, that means that taxpayers pick up the rest of the bill.

Critics on both sides of the aisle (including me) argue that the current system encourages schools to charge whatever they want for tuition, while discouraging students from making cost-conscious choices about their debt. It’s far from ideal, and this new proposal seeks to do something about it.

But since Congress is involved, the thing they want to do to “fix it” is stupid and will ultimately hurt student borrowers even more….

The new Senate budget proposal would remove the “financial hardship” showing currently needed to get into “Pay As You Earn.” This would allow many more people to enroll in the program. And that would arguably encourage more people to go into public service despite high student debt.

But to keep taxpayers from even further funding the boondoggle that higher education has become, there will be significant limits to how much debt the government will “forgive.” As a tipster puts it, here is the particularly “offensive language” from the bill:

• Capping Public Sector Loan Forgiveness (PSLF) at the aggregate loan limit for independent undergraduate students to protect against institutional practices that may further increase student indebtedness, while ensuring the program provides sufficient relief for students committed to public service;

• Establishing a 25-year forgiveness period for borrowers with balances above the aggregate loan limit for independent undergraduate students.

Here’s the Wall Street Journal’s glowing report on the proposal:

The White House said it would also seek changes “to ensure that the program is well-targeted and provides a safeguard against raising tuition at high-cost institutions.”

The move appears designed to address concerns that debt forgiveness, under existing terms, removes incentives for students to be cost-conscious and for schools to hold the line on tuition. The federal government backs more than 80% of the nation’s $1.1 trillion in student debt. Any federal loans that are forgiven are covered by U.S. taxpayers…

Among the changes proposed Tuesday, individual borrowers would face new limits on how much debt that could have forgiven. The amount forgiven for public-sector workers would be capped at $57,500. Borrowers with debt loads above $57,500 would make payments for 25 years. And payments for married borrowers filing separately would be calculated on their combined household adjusted gross income.

Now let me explain why this is all very dumb. Assuming that what we actually want is for schools to stop price-gouging students who don’t know the value of a dollar, how does this help?

Students are incredibly bad at predicting their job prospects three or four years into the future. Even when you tell them the facts, they all think that they are special snowflakes who will beat the odds. Are students going to take out less debt because now they’ll have to work at the DMV for 25 years instead of ten? No. THEY DON’T THINK THEY’LL BE WORKING AT THE DMV. They think that all that education and their own “hard work” will easily put them in a situation where they will earn enough money to pay their bills. Students don’t think about the “worst case scenario.” If they did, there would be no such thing as a “Romance Languages” major! Students think about the best possible outcome of all their hopes and dreams.

A student who currently isn’t critically thinking about what borrowing $50,000 a year in tuition will do to his or her bank account once the interest starts piling on is no way prepared to properly value what it means to be capped at $57,500 ten years after they graduate from an education that they’ve yet to begin. It’s Monopoly money. It doesn’t mean anything to them. “I’ll probably make more than $57,000 a year by the time I’m 30.” THAT’S WHAT THEY’LL THINK! They won’t think about interest and credit ratings and the fact that you can’t actually spend even a fraction of your entire pre-tax salary on debt repayment.

And that’s, of course, ignoring the “probably” part. That’s ignoring that students have a very dim understanding of their career prospects ten years out, and don’t do nearly enough research to come up with a more accurate “probability.” Hell… most grown and fully educated adults would be wise to not make “predictions” about how their career will develop over the next ten years.

Students are going to look at IBR the same way they do now: “Cool, that’s a good back up, but I probably won’t need it.” And you know who will be telling them to look at it that way? The schools who are desperate for students to borrow the money to support their outrageous tuition demands. These proposals won’t make SCHOOLS reduce tuition. Why in the hell would they care if the taxpayers have to pick up the bill in ten years or 25? THEY’VE ALREADY GOT PAID, HOMEY. The student’s check has done cleared. Let’s spend that money writing another law review paper that nobody will ever read.

These proposals further punish students who make unwise financial decisions, but they do nothing to stop schools from charging them. While some social Darwinists might get a hard-on from sticking it to students with poor financial planning skills, you can’t spin this as something that “provides a safeguard against raising tuition at high-cost institutions.”

You want a “safeguard”? I have one. After ten years, if a student owes more than $57,500 in outstanding debt, the SCHOOL that charged the ridiculous prices in the first place has to pay the government back. How about that? How about making the schools financially responsible for their willingness to saddle students with debt that they won’t be able to manage? Maybe the school should have an interest in charging people what they can afford, or, you know, EDUCATING THEM so they have the practical skills to make good on their payments.

Asking students to be cost-conscious is a great thing, but it’s not really going to happen. They’re kids. They’re going to school because they have hope, not because fear the worst. You don’t expect an eight-year-old to be able to fully appreciate what it costs to “have a dog,” you don’t expect a 15-year-old to fully appreciate what it costs to “have a girlfriend,” and you can’t really expect a 22-year-old to fully appreciate what it costs to “have six figures of debt following you around for the rest of your life.”

You know who does understand all that… the freaking schools who are charging them the money in the first place. If you want the tuition to come down, you have to hold the schools accountable and get them to put some of their skin in the game. Pick a school, any school, and ask them if they would loan all of their students this much money. Then watch their faces scrunch up like their petard just got hoisted up their asses.

The government has no idea what they’re doing here. It’s almost like most of them had their parents pay for school, worked corporate jobs until they paid off their debts, or wrote bestselling books to pay off their student loans.

2015 Budget: White House Proposes Broader Debt Forgiveness for Students [Wall Street Journal]

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