President Obama’s Fiscal Year 2015 budget appears to be cutting off access to what some groups have referred to “free student loans”, “scams” and “abuses” created by loopholes in the Income-Based Repayment plan.
But I’m personally a bit torn on this issue, because while these “abuses” or “scams” screw the taxpayers out of millions of dollars in funding, it also prevents saddling some of our most important citizens (mostly doctors and dentists from what I can tell) with crippling student loan debt.
I haven’t quite made up my mind about what I’d do if I were in charge of resolving this apparent “crisis”, but here are the facts so that you can decide for yourself.
An Existing IBR Loophole Offers “Free” Student Loans
Let’s be clear, first off, that “free” is in quotes for a reason.
The truth is that these aren’t free student loans, but that the price of them has been dramatically reduced due to a massive loophole in the laws governing the IBR plan.
Under existing law, borrowers are able to take out massive student loans (hundreds of thousands of dollars for things like Medical School, Dental School, or Law School), minimize their monthly payments after graduating, then qualify for loan forgiveness before they’ve paid off anything like a significant fraction of the debt load that they took on.
Arguments Against the Loophole
The Administration seeks to reduce student loan abuse with their proposed fiscal year 2015 budget, which includes a request to make serious changes to the Income-Based Repayment program for federal student loans.
In the past, President Obama’s reforms of the Income-Based Repayment plan created a huge loophole allowing rich graduate students to easily qualify for Federal Student Loan Forgiveness, even though they have been proven to be the population least likely to need it.
Allowing this loophole to continue promotes operating encourages students to take out massive student loan debt, basically work the system to their own selfish advantage, and screw taxpayers out of millions of dollars in federal funds.
Arguments For the Loophole
Only those who don’t take advantage of existing law would refer to it as a “scam”, a “loophole” or any other negative term, since it’s open and available to everybody.
Taking advantage of the so-called “loophole” requires a massive investment in time and resources, since it means completing an undergraduate degree, attending medical school, dental school, law school or some other post-baccalaureate program that’s time and labor intensive, as well as extremely expensive.
Student loan forgiveness isn’t available right away (you do have to make minimum payments on your debt for at least 10 years), and it’s only available to those borrowers/graduates who work for public service organizations (nonprofits, etc.), which offer significantly lower incomes than private for-profit organizations.
Doctors, Dentists, Lawyers, Graduate Students, Scientists and other highly educated people, who’ve been in school for 10 years or more, are likely to be for retaining the existing laws, since it allows them to dramatically reduce their education costs.
Is It the Worst of the Student Loan Scams?
Here’s a quick summary of the problem that the IBR loophole has created:
- Schools combined the uncapped benefit offered by Public Service Loan Forgiveness and unlimited borrowing allowed under the Grad PLUS program to encourage their students to take out massive loan debt (hundreds of thousands of dollars)
- These graduate students then landed jobs in “public service” at non-profits, earning relatively small salaries compared to all their debt, easily qualified for IBR repayment, made tiny monthly payments for 10 years, then qualified for full loan forgiveness
In certain cases, this allowed Doctors, Dentists, Lawyers and other high-earners to write off hundreds of thousands of dollars in debt, fully subsidized by our tax dollars.
The loophole thus subsidizes education costs for that small slice of the population who already earns great incomes, and it enriches educational institutions since they thrive on easy money, allowing them to raise education costs to exorbitant rates.
How Does Obama’s New Budget Stop This Abuse?
The 2015 fiscal year budget includes a couple changes that will help prevent people from abusing this loophole in the IBR and PSLF programs.
Here are the changes that the new budget seeks to put into place:
- The 10 year Public Service Loan Forgiveness program will come with a cap of just $57,000 in total debt forgiveness
- The 10-year payment cap (capping borrowers’ payments when monthly payment equals payment on 10-year term based on original loan balance), will be removed. This previously allowed payments to remain flag, even when income increased massively
- Married borrowers will no longer be able to remove their spouse’s income from the calculation determining how much they’re making, and thus how much they should be paying each month
- Loan forgiveness will no longer count as taxable income (this is actually going to help reduce the burden on those receiving loan forgiveness, so that they won’t have to pay income taxes on the amount of debt that gets forgiven)
- Eligibility will be streamlined so that the rules allowing you to qualify for loan forgiveness won’t be determined based on when you took out your loan (for example, President Obama’s Student Loan Forgiveness Program is only available to borrowers who took out loans on or after October 1st, 2007)
All in all, these are some pretty serious changes, and they’ll have a massive impact on those clever borrowers who have been planning to game the system for their own advantage.
What Do You Think?
Do Doctors, Dentists, Lawyers and other highly-educated, but also well-paid people deserve to get out of their student loan debt after making just 10 years of minimum payments? Or should everyone face the same rules for loan forgiveness?
Should we (taxpayers) be subsidizing the path to these high-income positions requiring extensive training, education, and personal expense? Or should everyone have to pay their own way?
Sound off in the comments section below!
By: Tim Marshall
Tim's experience struggling with crushing student loan debt led him to create the website Forget Student Loan Debt in 2011, where he offers advice, tips and tricks for paying off student loans as quickly and affordably as possible.
Hi Tim.
How’s about you stop telling people what to do with their lives and go after a man by the name of Albert Lord who has retired in his own private Golf Community in Naples?
If you’d like I can provide you and your other fellow “journalists” with his address, the chain of title for the properties he purchased, and other funds he absconded all in the name of furthering the higher education interests of America’s youth.
In other words, STOP TELLING People who worked hard what THEY should do. What THEY should do is tell you and every other BS journalist to shut the f up until you actually know what you’re talking about.
What the hell do you have to do with the other person’s income? And in addition what business is it of yours what the person has made to feed their family this past week, or month or year.
Journalist? Pffff… I could find out more about how this has worked with an internet connection at starbucks and a cup of coffee.
I’m not a journalist, nor have I ever claimed to be one.
I also am not telling people how to live their lives, other than offering advice on how to get out of paying back the full amount of their student loans.
I’m not sure where all the hatred is coming from, or why it’s directed toward me, but thanks for stopping by.
What’s the deal with this Albert Lord? I’d be interested to hear more about him. A quick Google search didn’t turn anything up…
Tim,
Thank you for your informative website, and the sharing of your knowledge, relating to the “extremely complicated” government student loan issues.
I am a 32 year old, recent MBA graduate (May 2014), who has not yet secured employment.
My Student loan debt, for my graduate degree, is around $120,000, with an 8% interest rate.
My loan payments are set to begin in August.
Is there something I should be doing now, to defer my student loan payments based on my current unemployment? Hopefully, I will secure employment by then, but if not, what steps should I be taking “now” to avoid going into default?
Any advice would be greatly appreciated.
Hi Jeremy,
If I were you, I’d get on one of the income-based Student Loan Repayment Plans as soon as possible, especially since you’re currently unemployed and can report $0 income.
The Pay As You Earn plan is my personal favorite, but if you can’t qualify for that one due to the eligibility restrictions, then check out the Income-Based Plan, the Income-Contingent Plan and the Income-Sensitive Plan. Any of these will set your monthly payments based on income.
In addition, you can delay repayment from beginning by filing for a Deferment or even a Forbearance, but tread cautiously here, as these can end up increasing the total amount you owe, and making it significantly harder to get out of debt in the long run.
Oh and Hi Tim.
Also some quasi legal background, when debtors prisons were eliminated years ago under English law , upon which ‘like it or not’ the entire american legal system is based with our own flair.
It was because noble lords ( think of them as banking magnates, or student loan “holding” companies) had begun abusing their access to the system to unceremoniously place people into slavery and if they did not pay their demands, they were thrown in prisons upon which they could not be released until payment of the “DEBT”. And then an entire system arose whereby the jailers started an entire industry of benefitting from the imprisoned.
Not unlike our modern higher education system in the land of the free, home of the brave.
In Germany, Japan, and other developed nations, Education is rewarded and seen as a noble pursuit.
Only in this backwards bastardization of King John’s begrudged signature do you see this horrifying twisting of all logic upon which those who wish to pursue further study are ridiculously subjected to this horrifying panorama of assaults upon them by the grossly embittered sadists.
Do you really not realize that things are dramatically different in America nowadays?
No one gets thrown in prison for holding excessive debt. Being a debtor doesn’t mean a jail sentence at all anymore, it just means that you may not be able to get any new loans, might have trouble finding a job, and will likely be living with a ton of stress. That’s a lot more fair than being tossed in jail and left to rot.
Your false equivalency is pretty weak here. You sound like a person with a lot of education, but a lack of refined critical thinking abilities. Maybe this situation hits too close to home for you? How much student loan debt are you currently carrying?
In America, people have the option of pursuing higher education, but unlike the other “developed nations” that you referenced, those who choose not to pursue it don’t end up having to pay for it.
In Germany, Japan, etc., citizens are paying for higher education whether or not they actually choose to utilize the benefit, in the form of significantly higher taxes. Why do you think these countries pay such a higher percentage of their annual incomes than we do?
No matter how you try to twist the facts, the truth is that America IS the land of the free, because we aren’t forced to pay for things we don’t use. Everyone here has REAL freedom of choice, including the freedom to take out or refuse to take out as much debt as they want.
Did you just graduate? Or did you just finish your first Political Science class? You sound like a pretty angry young man who doesn’t know where to focus his rage. You might want to try exercise, or perhaps counseling.
Good luck.
I got through undergrad debt free due to merit based academic scholarships. After graduating veterinary school I will be over 200K in debt. Vets make half of what a human doctor would expect to take home. This legislation will cripple my ability to lead a somewhat normal life.
I will no longer be entering the public health sector in the u.s. and am entertaining potential employment offers overseas.
Right off the bat, there should be a “grandfather clause” for people who have already taken out loans in reliance on the program being uncapped. It would be pretty harsh to apply the caps “retroactively” (“retroactive” in the sense that people have already been relying on PSLF in its prior form for a couple years)..
I think it’s pretty clear that the caps will push highly qualified graduate students out of public service. Some of the more extremist elements will cheer that on ideological grounds.
The proposal is overbroad. It was presumably intended to stop “rich” doctors from exploiting the 501(c)(3) loophole (doctors work for not-for-profits but still command high salaries). Fair enough. But what about the graduate student with a salary of $60,000, and a debt of $150,000? Well, they’re screwed.
Also it seems pretty ineffective. If it’s the schools who keep raising tuition that are the problem, why are you punishing the students? Why not tie limited tuition increases to maintaining tax-exempt status? Or only make loans available to students who attend schools with limited tuition increases? These options weren’t even discussed.
Hi Spliff,
Great suggestions in your comment! From what I’ve read, I do believe there will be a grandfather clause to protect those who’ve already taken out loans and are working toward achieving loan forgiveness via traditional means.
I’m with you on limiting the scope of the changes so that it truly only hurts the cream of the crop (the abusers), without destroying all hope for graduate students to get out of debt.
I don’t think you’ll ever see them going after the schools though, they’ve got a pretty powerful lobby in DC. We’ll see though.