Limit Forgiveness of Graduate Student Loans

Various programs exist that forgive federal student loans. In one kind, called income-driven repayment (IDR) plans, after borrowers make monthly payments (which are calculated as a percentage of income) for a certain period, usually 20 years, the outstanding balance of their loans is forgiven. Another program is Public Service Loan Forgiveness (PSLF), which is for borrowers in an IDR plan who are employed full time in public service; that program provides debt forgiveness after only 10 years of monthly payments. Neither the IDR plans nor the PSLF program limits the amount that can be forgiven. The programs’ biggest benefits go to people who borrow to attend graduate or professional school, because they tend to borrow larger amounts than people who borrow for undergraduate studies do.

This option includes two alternatives that would reduce loan forgiveness primarily for borrowers who took out federal student loans to pay for graduate school, starting with loans originated to new borrowers in July 2017. The first alternative would limit the amount that could be forgiven under the PSLF program to $57,500, shifting any remaining balance into an IDR plan with a longer repayment period. Because that limit is equal to the limit for federal student loans for undergraduate studies, and because there is no such maximum for graduate studies, the alternative would mostly affect students who borrow for graduate school. The second alternative would extend the repayment period—from 20 years to 25 years—for borrowers in an IDR plan who take out loans to finance graduate school. (The repayment period for borrowers with only undergraduate loans would continue to be 20 years.)

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). FCRA accounting, however, does not consider all the risks borne by the government. In particular, it does not consider market risk—the risk that taxpayers face because federal receipts from payments on student loans tend to be low when economic and financial conditions are poor and resources are therefore more valuable. 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 (or interest rates) used to calculate the present value of higher loan repayments under the option are higher for fair-value estimates than for FCRA estimates, and the savings from those higher repayments are correspondingly lower. (A present value is a single number that expresses a flow of current and future payments in terms of an equivalent lump sum paid today; the present value of future cash flows depends on the discount rate that is used to translate them into current dollars.)

Estimated according to the FCRA method, federal costs under the first alternative would be reduced by $7 billion from 2017 to 2026. According to the fair-value method, over the same period, federal costs would be reduced by $5 billion. Under the second alternative, CBO estimates, federal costs from 2017 to 2026 would be reduced by $12 billion according to the FCRA method and by $9 billion according to the fair-value method. If both alternatives were implemented, the total savings would be slightly greater than the sum of the savings if the alternatives were individually adopted because of interactions between the two alternatives.

An argument in favor of these alternatives is that reducing the amount of student debt that is forgiven—either by explicitly limiting the amount that would be forgiven or by extending the repayment period—would reduce students’ incentive to borrow and encourage them to enroll in graduate programs whose benefits, in terms of improved opportunities for employment, justified the costs of the additional schooling. The first alternative would encourage prospective graduate students to limit their borrowing because their loans would no longer be forgiven without regard to the outstanding balance. The second alternative would increase by 25 percent the number of payments that affected borrowers made—and because income tends to increase with experience, it would probably boost the sums that they repaid by an even larger percentage.

A second argument in favor of these alternatives is that they focus on people who have borrowed for graduate studies, who often have relatively high income and are therefore more likely to be able to pay back their loans eventually. The PSLF program is especially generous to borrowers who, after 10 years of repayment, still have heavy debt but also have high income and do not have trouble making the monthly payments. Many borrowers in the PSLF program who have relatively high income and who, under the first alternative, would receive only a partial forgiveness of their debt after 10 years of repayment would probably be able to repay their remaining debt in full. Under the second alternative, all borrowers for graduate school in an IDR plan would eventually pay more than they would otherwise, and more of those borrowers would completely pay off their debt before the end of the repayment period. (Under either alternative, IDR plans would continue to not limit the amount that could be forgiven, so debt relief would be provided to borrowers who, despite making regular payments for 20 or 25 years, could not pay off their debt.)

An argument against the alternatives is that they would increase the risk that students would not be able to repay their loans. The increased risk might lead some students to choose less graduate education or to forgo it altogether. Furthermore, limiting forgiveness under the PSLF program could discourage borrowers with graduate debt from seeking employment in public service. And both alternatives would disproportionately affect prospective graduate students with fewer financial resources, such as those who come from low-income families. Such students would be less likely to attend graduate school and consequently would have lower future earnings; if they did choose to take out loans to attend graduate school, they would be likelier to have heavy student debt later in life.