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Will the Federal Government Cap Student Loan Forgiveness?

Posted on Jun 04, 2014


ABC News reported recently that there has been much talk about the economic impact upon taxpayers that would result from the federal government forgiving portions of student loan debt through income based repayment plans (IBR and Pay As You Earn) and the Public Service Loan Forgiveness program.

Supposed Cost To Taxpayers

The Brown Center on Education Policy (BCEP) is quoted as estimating that roughly $14 billion could be lost each year just as a result of the Pay As You Earn plan, through lost interest revenue and forgiven principal.

In addition, this think tank believes that these programs create a “moral hazard” by encouraging students to borrow way too much, figuring their payments will be first capped by income and then forgiven. It could also  do little to reverse the spiraling cost of higher education.

So what do they want to do about it? BCEP recommends that forgiveness be replaced with tax policies that encourage students to choose careers in public service (so lower taxes instead of debt forgiveness) and increasing Pell Grant funding to support the financially underprivileged.

The Obama administration has proposed capping the amount of debt that would be eligible for forgiveness at $57,500. But all of this ignores certain other important facts.

Three Key Facts in Response

First of all, interest rates went up on new student loans in July of 2013, thus increasing the amount of “profit” to the federal government on these loans, which would certainly offset significantly the “loss” due to debt forgiveness and lack of interest payments on income based plans.

Second, student loan borrowing for undergraduate school (through Stafford and Perkins plans) is already capped and based on need: currently $31,000 for dependent students and $57,500 (the amount of the proposed cap) for independent students.

The real expense comes in through Parent PLUS loans for undergraduate school, and those are credit based. Perhaps a more stringent lending policy on these loans would be preferable to a forgiveness cap.

As to graduate school? Perhaps there should be a more circumspect decision here by college graduates as to how much education they can afford and how much is really needed.

Third, as pointed out by the article,

"isn’t it about time that the government asked for its money back from the schools that failed to produce outcomes that justify the expense? Much has been made of a plan to punish those colleges and universities with high cohort-default rates (post-graduation loan defaults) and even sub-par completion rates (roughly half of all college students end up earning a degree). But that’s on the come. What about the taxpayer dollars these schools have already banked? Wouldn’t it make sense for the feds to claw some of that back?”

Education is key to most opportunities in America. We need it for each generation that comes along, so that we, as a nation and people, can continue to experience growth and prosperity.

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