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!