How Student Loan Forgiveness Changed Graduates’ Paths

For Dr. Charles Phillips, the government’s public service loan forgiveness program meant he could spend his days researching childhood cancer, rather than starting a lucrative pediatrics practice.

Neeraj Kumar plans to take advantage of loan forgiveness to help reintegrate felons into society, instead of pursuing a career at a law firm.

For Rafael Enriquez, who dreams of a life of creativity and comfort at an architecture firm, the program has been a shackle of sorts. Instead of drafting the plans for daring new buildings, he is designing training facilities for the Navy SEALs.

Since 2007, more than 550,000 people have planned their lives around the program, which helps workers who go into government or nonprofit public service — police officers, teachers, nurses, public defenders and others — pay for their educations. Passed by Congress under President George W. Bush and expanded under President Barack Obama, it effectively erases any federal student debt that remains after 10 years of loan payments and public service employment.

The program has not yet cost the government anything; the first class of beneficiaries is on track to have any remaining debt erased beginning in October. But it could become expensive. Government estimates show that a quarter of the nation’s workers, with loans adding up to more than $100 billion, could conceivably be eligible.

And so it became an easy target for President Trump’s cost-cutting budget, which proposes to scrap the initiative after June 2018, and replace it with a less-generous plan available to graduates regardless of their jobs. (The loans of those accepted into the current program before the cutoff date would still be forgiven.)

The program has been praised for enticing college graduates to take on low-paying public service jobs, and criticized as perversely enticing students to take on large amounts of debt.

As Congress debates whether to go along with this and many other proposed cuts, some of the loan program’s beneficiaries spoke about how it shaped their decisions about what to do with their lives.

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Trump Is Right: Let’s End Subsidized Student Loans

President Trump’s proposed budget was underwhelming when it came to reforming the federal role in higher education. But in one area it was right on the mark: its proposal to eliminate subsidized student loans. While sold as a progressive policy, subsidized loans are anything but.

The federal government’s Stafford loan program gives undergraduate students access to two types of loans: “subsidized” and “unsubsidized.” Trump’s budget abolishes the former; students would still be eligible for the same dollar amount of loans, but all would be unsubsidized. This change would save taxpayers nearly $40 billion over a decade, per Education Department estimates.

Subsidized loans provide extra benefits to students from low-income families, but make no distinction between students who earn different incomes after college. A team of economists led by Raj Chetty recently published research showing that students from low- and high-income families who attend the same college have similar earnings prospects after graduation. But since eligibility for subsidized loans is based on income before college, two individuals with the same income after college may end up paying different amounts. That’s hardly equitable.

The notion that we should care more about a poor student who becomes rich than a rich student who becomes poor is an odd one , but it’s central to the idea of subsidized loans.

Consider two students, Rosencrantz and Guildenstern, who attend the same college. Each borrows $27,000 from the federal government. However, Rosencrantz comes from a lower-income family and thus uses mostly subsidized loans, while Guildenstern’s loans are all unsubsidized. After graduation, both enter the same field and earn the same income. They both enroll in the standard, 10-year loan repayment plan. Despite enjoying identical education and identical careers, Rosencrantz’s subsidized loans mean he will repay $2,300 less than Guildenstern.

Rosencrantz’s extra benefits are pricey for taxpayers. According to fair-value cost estimates from the Congressional Budget Office, new subsidized loans cost the government 25 cents for every dollar disbursed, compared to 16 cents on the dollar for unsubsidized loans. (Loans to graduate students are cheaper on a per-dollar basis; loans to parents actually turn a profit.)
Parenthetically, these figures show that both types of undergraduate loans are subsidized. If nothing else, perhaps the Trump administration could relabel unsubsidized loans as “somewhat subsidized,” and subsidized loans as “bigly subsidized.”

The main difference between the two programs is that interest accrues on unsubsidized loans while the borrower is still in school. For subsidized loans, interest does not accrue until the borrower leaves school, meaning that taxpayers forgive several years’ worth of interest while borrowers complete their studies. With over six million borrowers using subsidized loans every year, that interest-free benefit adds up.

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College grads face next hurdle: Paying back student loans

After all their hard work, the college class of 2017 is finally enjoying the real world and all its “perks,” including having to pay back their student loans.

The Federal Reserve Bank of New York’s latest report on household debt and credit found that outstanding student loan balances increased in the past year by $83 billion, to $1.34 trillion.

The Student Loan Report, a news site that covers issues related to education debt, conducted an online poll of 400 student loan borrowers from this year’s graduating class. The findings were encouraging and concerning.

Turns out nearly 80 percent of borrowers knew their student loan balance within $500. Most also could state their monthly loan payment within $20.

But the answers to other questions suggest an incomplete understanding both of their borrowing situations and of repayment plans that could give these budding professionals some financial relief.

When federal student loan borrowers were asked when their first payment is due, only a little more than half knew the grace period was six months after graduation.

Why is this important?

Borrowers shouldn’t wait until the first due date to make sure they can handle the monthly payments. A good first step is to contact the company servicing their loan to discuss all their repayment options and to make sure their email and mailing addresses are up to date. More than a third of graduates do not know the name of the company servicing their federal student loans.

Forty-three percent didn’t know that their federal loans had a fixed interest rate.

Sixty-five percent couldn’t say how many years it would take under the standard plan to pay off their loans. It’s 10 years. This is key because the payments under the standard option might be too high for their budget. If this is the case, they should consider an income-based repayment plan.

The poll also found that ­40 percent of borrowers did not have a good grasp of income-driven plans offered for federal loans. There are four options:

● Income-based repayment plan (IBR).

● Pay-as-you-earn repayment plan (PAYE).

● Revised pay-as-you-earn repayment plan (REPAYE).

● Income-contingent repayment plan (ICR).

You can learn about the differences in the plans by going to

A report last month from the Consumer Financial Protection Bureau found that borrowers in income-based plans have much lower default rates than those enrolled in other types of payment arrangements. The CFPB said that 9 in 10 of the highest-risk borrowers were not enrolled in affordable federal repayment plans that allow them to pay based on how much they earn. According to the report, the Education Department estimates that more than 8 million federal student loan borrowers went at least 12 months without making a required monthly payment.

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Trump is pushing the student loan system to the brink of failure

Secretary of Education Betsy DeVos reimposed a 16 percent fee on defaulted loans. Her department then warned that letters to borrowers affirming good standing in the Public Service Loan Forgiveness Program were invalid.

The first four months of the Trump administration have, among other things, seen repeated assaults on the nation’s student loan borrowers. Education Secretary Betsy DeVos came into office and reimposed a 16 percent fee on defaulted loans. Her department then warned that letters to borrowers affirming good standing in the Public Service Loan Forgiveness Program were invalid. The president’s budget, meanwhile, calls for the elimination of the program entirely, as well as the elimination of interest breaks for students while in school and in deferment. All these moves make loans more expensive to the borrowers, and more lucrative for the government and its contractors.

To be clear: The student loan crisis was escalating quickly before Trump took over. Under President Obama, nearly $1 trillion was added to the nation’s student debt tab to a current total of almost $1.5 trillion. Last year, 1.1 million people were added to the default roles, a huge increase from the 400,000 added the year before. At this rate, more than 25 percent of all borrowers will be in default when the mid-term elections happen next year.

A study following 2005 graduates — who borrowed half as much as today’s graduates — found that a whopping 63 percent were either in default, forbearance, or deferment, or were delinquent, by 2010. The Wall Street Journal reported last year that the same percentage of all borrowers are currently not able to pay their loans down. This is 27 million people of the 44 million who carry student debt.

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