(Janet Loren) Laura Strong, a 29-year-old in suburban Chicago, owes $245,000 on student loans for the psychology Ph.D. she finished in 2013. This year, she says she hopes to earn $35,000 working part-time jobs as a therapist and yoga teacher—not enough to manage a loan payment of about $2,000 a month. But Strong isn’t paying anything close to that. She’s one of at least 3.8 million Americans who’ve qualified for federal programs that tie payments to income and eventually forgive debt for some struggling borrowers, leaving taxpayers to pick up the tab.
President Obama has praised the programs for offering a lifeline to borrowers who’d otherwise default, scarring their credit. Strong pays about $100 a month on her federal loans, which she used to finance her graduate studies at Argosy University, a for-profit institution. “I wouldn’t know how I would pay it back otherwise,” she says.
Income-based repayment was introduced under President Clinton, but the programs weren’t heavily promoted until late 2013, when the Obama administration began sending e-mails to borrowers, including Strong, telling them, “Your initial payment could be as low as $0 a month.” The number of people using these plans has quadrupled since 2012. About half of borrowers taking out the Department of Education’s Grad Plus loans, which finance advanced-degree studies, are in income-driven plans. Most borrowers in the programs have payments capped at 15 percent of income, with allowances for housing and other expenses. In December the Obama administration is expected to expand the number of borrowers eligible for a payment cap of 10 percent. In a July 27 speech at the University of Maryland’s Baltimore campus, Secretary of Education Arne Duncan said the plans protect people going into socially valuable but low-paying lines of work from crushing debt. “That’s good for them. That’s good for our economy. It’s good for our society,” he said.
Critics say the plans are a hidden subsidy to well-off students and colleges, which can justify tuition increases by reassuring students that they may not have to repay their debt. In a seminar at Georgetown Law, Charles Pruett, assistant dean for financial aid, was captured on video telling alumni they could “ignore” debt balances if they spent 10 years in government or nonprofit jobs, which would qualify them for early loan forgiveness. (The video was first reported in 2013 by the New America Foundation, a Washington think tank.) Pruett says Georgetown promotes the programs to encourage graduates to take public-service jobs. “It’s an earned benefit, not a giveaway,” he says.
Borrowers hold $1.2 trillion in federal student loans, the second-biggest category of consumer debt, after mortgages. Of that, more than $200 billion is in plans with an income-based repayment option, according to the Department of Education and Moody’s Investors Service; of those loans, $190 billion were originated by the department after 2010 or bought by the government during the financial crisis. Both Moody’s and Fitch Ratings are considering cutting ratings for securities tied to those loans—an extraordinary development, since the government guarantees the debt. For taxpayers the loans are “a slow-ticking time bomb,” says Stephen Stanley, a former Federal Reserve economist who’s now chief economist at Amherst Pierpont Securities in Stamford, Conn.
The Congressional Budget Office estimates that, for loans originated in 2015 or after, the programs will cost the government an additional $39 billion over the next decade. That’s more than the agency spends each year on Pell grants, the public scholarship program for low-income students. “In a time of scarce resources, is it better to spend money in that way or raise the Pell grant?” asks Margaret Spellings, who served as education secretary under George W. Bush.
The U.S. Government Accountability Office is opening a review of the cost of the plans following a June 19 request filed by Mike Enzi, the Wyoming Republican who chairs the Senate Budget Committee. According to spokesman Joe Brenckle, Enzi is concerned about the “fiscal uncertainty” surrounding the long-term costs of the income-based repayment plans.
Some graduates would prefer tuition cuts over loan breaks. In 2009, Kyle McEntee, a 2011 graduate of Vanderbilt Law School, co-founded a nonprofit called Law School Transparency to advocate for reducing the costs of legal education. “It doesn’t seem like a great idea to have a legal education set up where forgiveness from the federal government is the only way you can afford to go to law school,” he says. McEntee speaks from experience. He’s enrolled in the public-service forgiveness plan. His monthly payment: zero.
The bottom line: A federal program to help student borrowers get out from under debt may cost taxpayers billions.