Student Debt Forgiveness Plans Skyrocket

April 25, 2014

Enrollment in student debt forgiveness programs has skyrocketed in recent months, says the Wall Street Journal.

In a short six months, enrollment in federal programs that forgive some amounts of student debt has shot up 40 percent to include at least 1.3 million Americans owing about $72 billion. Officials are looking to curb these expensive programs, fearing that they could send college tuition costs upward, because both borrowers and schools have less incentive to control costs with these plans in place.

There are two federal loan repayment plans at issue here, the most popular of which is Pay As You Earn (PAYE), redesigned by President Obama in 2011.

  • The plan requires that student borrowers pay 10 percent annually of their discretionary income -- which means income above 150 percent of the poverty level -- back in monthly installments.
  • After 10 years, any unpaid balances are forgiven if the student works in the public sector or for a nonprofit. For private sector workers, that debt is forgiven after 20 years.
  • There is no limit on debt eligible for forgiveness. Last month, President Obama proposed to cap the amount of debt eligible for forgiveness at $57,500.

Some law schools -- including Columbia University, University of Chicago and Georgetown University -- have started offering their own plans to students, guaranteeing to cover graduates' loan repayments until their debt is forgiven. This could be very expensive. For example:

  • Max Norris, who graduated from the University of California's Hastings College of Law, makes $60,000 per year in his job. After aid from his law school, his out-of-pocket expense is only $100 each month on his $172,000 in debt. After 10 years, he would have $225,000 in debt forgiven.
  • Norris intended to take advantage of this program from the outset: "My intent the whole time in going through law school was to take advantage of this program."

Georgetown's law school website recently advertised that their student aid plan, combined with the federal plan, "means public interest borrowers might not pay a single penny on their loans -- ever!"

Source: Josh Mitchell, "Student-Debt Forgiveness Plans Skyrocket, Raising Fears Over Costs, Higher Tuition," Wall Street Journal, April 22, 2014.

 

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