The White House’s proposed 2015 budget contains a provision that will significantly alter the way the federal government handles student loans. If you have more than $57,500 in federally-backed student loans, you should pay particularly close attention.
Currently, individuals who take out federally-backed student loans must make payments for at least 20 years. After 20 years, the remaining debt is forgiven. However, the time frame for debt forgiveness is reduced to 10 years if you work in Public Service (Government or non-profit sector). Most students know this as the “Public Service Loan Forgiveness” program.
Under current law, some people with federal student loan debt may qualify for a repayment program known as “Pay As You Earn” (PAYE). This program allows individuals who demonstrate “financial hardship” to make repayments based on a percentage of your income. The percentage increases as a function of the size of your income relative to your debt burden. There is currently a 10% ceiling on repayments in this program, as a percentage of your “discretionary income.”
The Obama administration’s 2015 budget proposal would expand eligibility for the PAYE program by removing the “financial hardship” requirement. However, it places a cap on debt forgiveness for the Public Service Loan Forgiveness program, and raises the ceiling for the 20-year debt forgiveness program. Under the new budget, only people with student loan debt of $57,500 or less will be eligible for 10-year Public Service Loan Forgiveness program. The ceiling for loan forgiveness outside of the Public Service Loan Forgiveness program has also been raised to 25 years instead of 20.
The good news for this reform is that it gives more people access to the PAYE program, which will reduce their debt burdens considerably. It will also save the federal government money.
The bad news is that everybody who already made the decision to attend college or graduate school in reliance on the availability of the 10-year Public Service Loan Forgiveness Program is now getting screwed. I know many colleagues from Law School who planned their academic and professional careers in reliance on this program. There are also people who probably would not have gone deep into debt pursuing graduate-level degrees if they didn’t think they could get their loans forgiven in 10 years. This change affects tens of thousands of graduate students, including law students and med school students whose debt burdens not uncommonly reach over $200k, and in same cases, closer to 300k-400k.
There’s a simple fix for this problem that retains the reforms without hurting the people who already went into debt in reliance on the 10-year Public Service Loan Forgiveness program. The Obama administration simply needs to add an amendment to their proposed budget grandfathering in students who obtained federally-backed student loans in reliance on the 10-year program. It is unconscionable to make a benefit available to the public, have people plan their lives and careers around it, and then take it away after they’ve made irrevocable life decisions in reliance on that benefit.
It is also worth noting that the U.S. is fairly unique among 1st-world countries in forcing its students to go so deeply into debt to attain high-level degrees. PhD programs in Sweden, for example, are tuition-free for Swedish citizens. In England, doctors are currently up in arms over paying much less than half what it costs to attend med school in the U.S. (in England, the “average graduate debt for medical students is £20,000.”). When you compare the cost of education in the U.S. to other countries, it’s pretty clear that the U.S. leaves much to be desired.
Nonetheless, the Obama administration should amend the proposed reforms to make sure that students who went to school thinking they could rely on the Public Service Loan Forgiveness program don’t get left out in the cold. A grandfather amendment should be added so that students who already went into debt intending to take advantage of this law may do so.