Reduce or Eliminate Public Service Loan Forgiveness

Background

A variety of programs forgive federal student loans. In one kind of program, known as an income-driven repayment (IDR) plan, monthly payments are calculated each year as a share of a borrower's family income, typically 10 percent to 15 percent of an estimate of discretionary income. The amount of the monthly payment is recalculated each year in response to changes in the borrower's family income and family size. After the borrower has made payments for a certain period, usually 20 years, the outstanding balance of his or her loan is forgiven, although the borrower is liable for income taxes on that forgiven debt. In addition, borrowers in an IDR plan are eligible for the Public Service Loan Forgiveness (PSLF) program if they are employed full time in public service. The program provides debt forgiveness after 10 years of monthly payments. In addition, PSLF borrowers are not liable for income taxes on the forgiven debt. Neither IDR plans nor the PSLF program impose a limit on the amount of debt that can be forgiven.

Option

This option includes two alternatives, which would apply to federal student loans taken out by new borrowers as of July 1, 2019. The first would cap the amount of debt that could be forgiven under PSLF at $57,500—the current aggregate limit on loans to independent undergraduate students. Borrowers with a balance remaining after receiving the maximum forgiveness under PSLF would continue making payments under a repayment plan of their choice, including IDR plans, and, as a result, could receive additional forgiveness after making payments for the required additional time. Because the cap is equal to the limit for federal student loans for undergraduate studies, and because there is no such maximum for graduate studies, the first alternative would mostly affect students who borrow for graduate school, especially those borrowers who have high debt compared with their post-school income.

The second alternative would eliminate the PSLF program. Borrowers would still have the option of choosing an IDR plan and, as a result, could ultimately receive loan forgiveness (albeit at the end of a longer period of making payments). The alternative would affect all borrowers who enter public service with outstanding student loans, but again would have the greatest impact on those who have high debt compared with their income.

Neither alternative would eliminate debt forgiveness under IDR plans.

Effects on the Budget

When estimating the budgetary effects of proposals to change federal loan programs, the Congressional Budget Office is required by law to use the method established in the Federal Credit Reform Act (FCRA). Under FCRA accounting, projected cash flows—including projected flows after 2028—are discounted to the present value in the year the loan was taken out using interest rates on Treasury securities. (Present value is a single number that expresses a flow of current and future payments in terms of an equivalent lump sum paid today and that depends on the rate of interest, or discount rate, that is used to translate future cash flows into current dollars.) FCRA accounting, however, does not consider all the risks borne by the government. In particular, it does not consider market risk—which arises from shifts in macroeconomic conditions, such as productivity and employment, and from changes in expectations about future macroeconomic conditions. The government is exposed to market risk because, when the economy is weak, borrowers default on their debt obligations more frequently, and recoveries from borrowers are lower. Under an alternative method, the fair-value approach, estimates are based on market values—market prices when they are available, or approximations of market prices when they are not—which better account for the risk that the government takes on. As a result, the discount rates used to calculate the present value of higher loan repayments under this option are higher for fair-value estimates than for FCRA estimates, and the savings from those higher repayments are correspondingly lower.

Estimated according to the FCRA method, annual federal costs under the first alternative would fall by $9 billion from 2019 to 2028. According to the fair-value method, over the same period, annual federal costs would fall by $6 billion. Under the second alternative, CBO estimates, federal costs from 2019 to 2028 would be reduced by $22 billion according to the FCRA method and by $18 billion according to the fair-value method.

The option would only affect new borrowers as of July 1, 2019, so savings would rise over time because each new cohort of loans would include a larger share of borrowers who have not previously taken out student loans. Based on data for recent years showing IDR usage and eligibility for forgiveness of loans under PSLF, CBO projects that roughly 10 percent of federal loans to students originated each year between 2019 and 2028 ultimately will receive forgiveness of outstanding balances (calculated as the origination amount minus the principal repaid, plus accumulated interest) under PSLF.

Considerable uncertainty surrounds CBO's estimates of savings under this option. It arises from uncertainty about the number of borrowers who will enter public service occupations and remain in those occupations for 10 years, the earnings of those borrowers over their public service careers, and the amount of student loan debt those borrowers would still owe at the end of 10 years of service.

Other Effects

An argument for eliminating PSLF is that doing so would remove the difference in compensation (including loan forgiveness) between public service employees with student loans and those without them. Student loan borrowers who receive loan forgiveness effectively receive more compensation for their public service work than other public service employees who did not receive loan forgiveness. If the goal of PSLF is to increase pay for public service jobs, it would be more efficient to subsidize everyone who chose to enter public service work.

An argument against eliminating PSLF is that it would reduce some incentives from accepting public service jobs over other jobs. PSLF reduces the risk of borrowing to pay for education for those who are likely to have public service employment options, such as law school graduates who could work as public defenders, because they can always enter public service and discharge their debt after making payments for a specified number of years. The elimination of public service loan forgiveness might also prevent some people from working in the public sector, possibly reducing the supply of workers for those types of jobs compared with the supply under current law.