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Student-debt forgiveness plans skyrocket

As fears rise over costs and higher tuition, some law schools advertise their own plans to cover loan replacements.

By Money Staff Apr 22, 2014 1:44PM

This post comes from Josh Mitchell at partner site The Wall Street Journal.

The Wall Street Journal on MSN MoneyGovernment officials are trying to rein in increasingly popular federal programs that forgive some student debt, amid rising concerns over the plans' costs and the possibility they could encourage colleges to push tuition even higher.

Graduation cap © Stephen Wisbauer/Getty ImagesEnrollment in the plans—which allow students to rack up big debts and then forgive the unpaid balance after a set period—has surged nearly 40 percent in just six months, to include at least 1.3 million Americans owing around $72 billion, U.S. Education Department records show.

The popularity of the programs comes as top law schools are now advertising their own plans that offer to cover a graduate's federal loan repayments until outstanding debt is forgiven. The school aid opens the way for free or greatly subsidized degrees at taxpayer expense.

At issue are two federal loan repayment plans created by Congress, originally to help students with big debt loads and to promote work in lower-paying jobs outside the private sector.

The fastest-growing plan, revamped by President Barack Obama in 2011, requires borrowers to pay 10 percent a year of their discretionary income—annual income above 150 percent of the poverty level—in monthly installments. Under the plan, the unpaid balances for those working in the public sector or for nonprofits are then forgiven after 10 years.

Private-sector workers also see their debts wiped clean—after a longer period of 20 years—reflecting a government aim to have no one, wherever they work, paying down student debt their entire working life.

An independent study estimates the future cost of the 2011 program, known as Pay As You Earn, could hit $14 billion a year.

The Obama administration has proposed in its latest budget released last month to cap debt eligible for forgiveness at $57,500 per student. There is currently no limit on such debt.

The move reflects concerns in the administration not just about the hit to the government, but over the risk that promising huge debt forgiveness could make borrowers and schools less disciplined about costs. Colleges might charge more than they would otherwise, leading students to borrow more.

Federal data show tuition and fees are up more than 6 percent a year on average in the past decade, more than 2 1/2 times inflation.

Congress is unlikely to pass the proposed revamp this year, but the administration has pushed other changes, such as extending the forgiveness window to 25 years for the most-indebted students. The main aim, administration officials say, is to curb eligibility for forgiveness while allowing more borrowers to repay loans based on their income.

Dorie Nolt, a spokeswoman for Education Secretary Arne Duncan, said the proposals are meant to ensure the "neediest borrowers" benefit and to protect the program from "institutional practices that may further increase student indebtedness."

Supporters of the forgiveness program say it is working largely as designed.

"Given the increasing cost of college, the need to borrow money to cover tuition payments can price students out of socially important but historically low-paying jobs, like teaching and social work," said Rep. George Miller of California, the senior Democrat on the House education committee.

A top Senate Republican, however, is calling for change.

"Income-based repayment can be a way for students responsibly to manage debt, but it should not be a bailout for students who borrow too much or for schools who charge too much," said Sen. Lamar Alexander of Tennessee, the ranking Republican on the Senate Education Committee.

Law schools at Columbia University, the University of Chicago and Georgetown University are among those offering some graduates additional aid to cover all or part of their minimum monthly payments under the federal plans.

Max Norris, a 29-year-old lawyer for the state of California, illustrates the potential costs of the program. He pays about $420 a month to the Education Department on his $172,000 in debt, which he says fails even to cover the interest owed. But his out-of-pocket expense falls to $100 monthly after aid from his school, University of California's Hastings College of Law.

Courtesy of The Wall Street Journal

Mr. Norris, who makes $60,000 a year in his job, would have about $225,000 in debt forgiven after 10 years, assuming he stays in public service and his salary rises 4 percent annually, according to a repayment calculator created by the New America Foundation, which advocates less-generous forgiveness.

He said he learned of the programs before enrolling. "My intent the whole time in going through law school was to take advantage of this program," he said.

Schools aren't shy in touting the programs' benefits.

Georgetown said on its law-school website until recently the school's aid combined with the federal plan "means public interest borrowers might not pay a single penny on their loans—ever!" A school spokeswoman said the statement was removed this year in light of the proposed changes in Mr. Obama's budget.

Georgetown Law Dean William Treanor said the school sees steering graduates to public-service jobs as part of its Jesuit mission. The school, which assists only those who go on to work in the public sector, spent about $2 million last year covering payments for those in the federal program, he said. In all, 432 Georgetown graduates are now in the program, up from 264 in 2012. Annual tuition is $50,890.

Mr. Treanor said the program doesn't influence the prices the school charges its students.

The plans' long-term costs have greatly outpaced the government's predictions. In the last fiscal year, debt absorbed by the repayment plans from the most widely used student-loan program—Stafford loans—exceeded government expectations from a year earlier by 90 percent.

A report last week from the Brookings Institution, a centrist think tank, offered one of the few preliminary examinations of the programs' impact. The most popular plan could cost taxpayers $14 billion a year if it becomes available to all borrowers as Mr. Obama has proposed, while fueling tuition inflation, it said.

"Loan forgiveness creates incentives for students to borrow too much to attend college, potentially contributing to rising college prices for everyone," the study said. The authors recommend scrapping the forgiveness provisions.

Student debt has nearly doubled since 2007 to $1.1 trillion, disproportionately driven by the growth in graduate-school debt.

The government has offered some form of income-based repayment since the early 1990s, but few students found the terms enticing. But in 2007, Congress allowed borrowers working in nonprofit and government jobs to have unpaid debt forgiven after 10 years, and cut monthly payments for new borrowers to 15 percent of discretionary income.

In 2010, it cut those payments to 10 percent for borrowers who took out loans from 2014. A year later, Mr. Obama, through executive action, moved up the date when borrowers could qualify for the new terms, creating a program for those who took out loans from 2011. The White House this year has proposed making the program available to all student borrowers, regardless of when they signed their loans.

The popularity of the programs surged after the Obama administration began to promote them, starting in 2012, on the Internet and later through email to borrowers.

Supporters of generous loan-forgiveness plans for public-service workers say the policy helps talented workers stay in jobs that typically pay less than the private sector.

"As soon as the government had them trained up for public jobs they left it. It was an incredible cost," said Philip Schrag, a Georgetown University professor who has researched the income-based repayment programs.

The plans are designed to help people like Jacqueline Grippe, a Monroe County assistant public defender in Rochester, N.Y. Using an income-based repayment plan, Ms. Grippe pays about $350 a month toward her roughly $180,000 in debt, most of it accrued at Syracuse University's law school, from which she graduated in 2012.

That keeps her payment manageable on a $58,500 salary, she said, and relieves the pressure of having to find work at a higher-paying law firm. Syracuse isn't assisting in the payments.

"Being in the public sector is a calling for me," said Ms. Grippe, 29. Without the repayment plan, she said, "I don't know what I would do."

More from The Wall Street Journal

Apr 22, 2014 4:51PM

I worked for the first year after high school to save for college.  Then while was in college, I worked nearly full time plus 2 jobs during the summer.  I went to a state university because it was less expensive that private universities.  Graduated with under $5000 of student loans.  Now as a taxpayer I have to pay for others college who won't sacrifice like I did to get an education.  How much are these kids contributing to their education? 

Apr 22, 2014 4:03PM
Once again a program that in theory was a good one with good intentions gets abused by people.  The fact that schools are promoting this to attract students is ridiculous.  so instead of helping people pay these loans how about we attack the costs.  if Georgetown wants to steer people into public service how about you charge no tuition to people willing to work for non profits or governments for 10 years.  if they leave early then they have to repay the prorated cost of tuition.
Apr 22, 2014 4:11PM
If colleges and universities weren't so greedy over charging people for education, then we wouldn't have this mess now. I remember when almost anyone could afford to go to school without having to mortgage the family farm to do so. It has become outrageous and unaffordable. I heard in some colleges the enrollment figures are at it's all time lowest and are giving potential students a discount in order to lure them in. If more people boycotted these colleges and universities, maybe we would see an decrease in tuition costs.
Apr 22, 2014 9:51PM
This debt should not be the responsibility  of the tax payers. These people should pay their own debt. Its their responsibility. 
Apr 22, 2014 6:57PM
No such ting as "Free", who really gets stuck with the bill?

Any guesses?
Apr 22, 2014 8:30PM
$172,000 in debt for your education?  Ain't no lawyer worth that much free money.  Especially when it's likely he'll end up as a congressman.
Apr 22, 2014 4:54PM
Ok, I just have to say that is messed up. Yes, school is expensive, too expensive. But what do you think will happen when they don't get paid due to all this loan forgiveness? Sounds like a familiar disaster... if you cant afford a 250k education, find it somewhere else, find it somewhere cheaper, or find it somewhere you WILL make enough to pay it off without copping out.
Apr 22, 2014 7:21PM

Bend over hard working, taxpaying US Citizens - the obama Administration is going to give it you again.  Buying votes for the progressive left and democratic party using Taxpayer money, more Americans dependent on the government for something, education payments, food stamps, Obama phones, housing,  obamacare subsidies (before ACA my healthcare cost were less than $100 a month - now without even stepping in a Dr. office my cost are nearly $300 - last week I paid for two insurance covered prescription nearly $400.00 - under my old insurance plan $20.00, Under President Bush gas went above $2 a gallon and democrats and progressive left accused Bush of 'wiping out the middle class', obama is able to do the old shuck and jive and no one say a thing.

My son, who is paying for his own education, mentioned something over the weekend. He said there are only two reasons dictators are able to rise in a society - Economics and Religion. Basically every dictator has used one of the two to gain power. I am nearly 60 and the next thing he said knocked me over, it was something I had never thought possible in my life time but now I don't know - 'Do you think Obama is going to step down when his term is up or do you think he will try to become a dictator under the guise of some economic crises - the federal debt continues to grow everyday and has reached the point we may never be able to pay it off'.

Apr 22, 2014 4:11PM
Apr 22, 2014 4:26PM

"The fastest-growing plan, revamped by President Barack Obama in 2011, requires borrowers to pay 10 percent a year of their discretionary income—annual income above 150 percent of the poverty level—in monthly installments. Under the plan, the unpaid balances for those working in the public sector or for nonprofits are then forgiven after 10 years."


So basically, you get free college if you never leave the system?  It's not written very clearly but since their talking about discretionary income, what's to stop one from keeping their "discretionary income" at 5 bucks?  After the BMW payments, vacations, and 2nd mortgages....  50 cents a month for ten years, then a zero balence, just so long as you're a cog in the preferred machine right.

Apr 22, 2014 4:25PM

Government loans are partly to blame for why tuition is where it is at now. The availability of loans makes it possible for people to ignore what the real costs are and find out in the future.

Apr 22, 2014 4:58PM
Nobody has to pay their debts in this country.  We just print more!!!  Yay America.
Apr 23, 2014 12:00AM
First the feds created the housing bubble and the real estate market crashed hard....... really hard. 

Well boys and girls guess what....... What the feds did to the housing market, they are NOW doing to the student loans. 
Apr 22, 2014 7:19PM
And the house of cards grows higher.
Apr 22, 2014 4:18PM
After everyone is unemployed/underpaid and cannot afford an education, food, health care, gas, taxes, etc. what will they do? Hopefully wise up and vote these demos out that have the economy crippled.
Apr 22, 2014 6:58PM
      Loan forgiveness will occur under the dear leader in 2016, as he tries to smooth things over with all of the 20 somethings who will just be realizing they're getting raked over the coals by Obamacare. Just in time to schmooze them into voting for Hillary or Plugs Biden in two years.
Apr 22, 2014 6:31PM
No forgiveness, just pass the bill down.... to their children's children.
Apr 22, 2014 4:40PM
Apr 23, 2014 2:50PM

Damn...the middle-class taxpayer has to support Mr. and Mrs. Illegal Immigrant and all their children, plus the Welfare Mothers of America and their babies - now we have to foot the bill so lawyers can go to college?


How about throwing some money OUR way for a change?

Apr 23, 2014 8:39AM
BS. I paid my own way and so are my kids. How about a rebate for us too? So fricken tired of these whiners. You signed on for the loan, you get to pay it back. Not the taxpayer, who it all trickles down to.
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