The 10th Man

Public Service Loan Forgiveness

January 24, 2019

The Public Service Loan Forgiveness program was signed into law by the Bush Administration in 2007. The idea was to give financial relief to people who had spent a lot of money on higher education, but chose to work in less financially-rewarding jobs. This included people at any level of government service, including 501(c)(3) not-for-profit organizations.

I heard about the PSLF in conversation a couple of years ago, and I genuinely thought it was a scam. Having your student loans forgiven by working in public service? It definitely sounded too good to be true.

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It is true, but it is a mess. Some 41,000 individual borrowers have attempted to take advantage of the program—with only about 200 requests granted. That’s an approval rate of less than one percent.

Why?

Well, the requirements are pretty stringent:

  1. Borrowers must have Direct Loans as opposed to other types of loans.
  1. They have to be in a specific repayment plan, and of course, they have to work in the right type of job.
  1. Most importantly, borrowers must make 120 successful payments, which don’t need to be consecutive.
  1. And the payments have to be for the exact minimum amount, or else the loan is in “paid-ahead” status, and disqualified.

And the Department of Education did not do a great job of communicating the requirements, so there is a slew of applicants who are in the wrong types of loans or making the wrong types of payments. It is a bit of a fiasco.

Last March, the government put a band-aid on this by allocating some additional money for borrowers who were in a qualified public service job, but were barred from PSLF because their repayment plan did not qualify.

But because a lot of student loans were private before 2010, there simply aren’t that many people who fulfill the requirements anyway, and there won’t be for a while.

     
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Here Is Where Things Get Interesting

Say you make 120 (or more) payments on your student loans, and those payments are predominantly interest (because remember, you need to pay the exact minimum amount to qualify for PSLF).

At the end of ten years, you would almost have paid off the entire balance of your student loans—in interest payments. If a borrower had taken the same money and aggressively paid off the loans, allocating the money to principal, the loans would mostly have been paid off.

I could not dream up a crueler government program if I tried. The PSLF has incentivized tens of thousands of people to pay the minimum on their student loans in the hope that they will one day be forgiven.

Of course, after a decade of paying the minimum on your student loans, your finances are completely wrecked, and you will be dependent on a bailout.

Yes, the program has noble intentions, and yes, it is unimaginably cruel. Yet the part that is astounding is the number of people who line up for it, facing such enormous odds.

Over time, communication will improve and more people will be able to take advantage of PSLF. But for now, borrowers don’t have much of a chance of forgiveness—and are willing to financially impale themselves while they wait.

The Constraints Of Debt

There is something peculiar about the American experience, where paying down debt is considered to be one of the least psychologically rewarding things you can do.

Consumption is rewarding: you get to buy cars, jewelry, clothes.

Investing is rewarding: you get to buy stocks and watch them increase in value.

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Paying down debt isn’t rewarding at all. You log in to look at your mortgage and the number is smaller—big deal.

Whether it’s a car loan, a home mortgage, a student loan, or any type of loan, the number of people who aggressively pay down principal and retire the debt ahead of the maturity date is very small.

There are a couple of different ways to look at debt.

  • The Wall Street way is to look at a 4% mortgage, and ask the following question: can I make more than 4% in the capital markets? If so, I should keep the debt and invest the free cash in stocks and bonds and earn the spread. This is not irrational. Any textbook will tell you to do this.
  • A less enlightened way (my way) to look at it is as follows: any interest you pay to a bank is unproductive and should be minimized.

To have debt is to be constrained, and true freedom comes from being free of debt. We learned recently that 1 in 5 millennials expect to die without ever paying off their debt. What a horrible existence.

The PSLF paints a pretty grim picture of Americans’ attitudes towards debt—they will do absolutely anything to avoid paying it off.

A recession would certainly change people’s perspective on debt, just like the last one did. Judging from the behavior of government workers affected by the shutdown, people are pretty stretched. At the tippy-top of the cycle, that is not very encouraging.

Jared Dillian
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Comments

bagpiper7er@yahoo.com

Jan. 27, 1:22 p.m.

Could this program also be the product of political solutions?  This looks like a program with feel good intentions and well meaning but because of the fiscal cost it was designed ON PURPOSE to never really be taken seriously?  Both sides of the aisle can claim they did something while really doing nothing.

Mike Leach

Jan. 25, 12:47 p.m.

Yep.  A very sad situation all around.

Take the case of my own daughter.  In her 40’s, after a “detour”, she turned her life around.  She went to college and got her bachelors’ and then her masters’ degrees.  The degrees are in social work, which pretty much guarantees a lifetime of low-income jobs, whether she works in the public or private sectors.  Perhaps not the wisest choice of majors, but far better then where she was headed at one time.  She insisted on doing all this without help from anyone.  She is now done, and full-time employed (and going with a really great guy).  Mom & Dad (and step-mom & step-dad) are all quite proud of her. 

Unfortunately, daughter does have student loan debts she will NEVER be able to repay.  At her likely lifetime income levels, paying extra and paying down principle is an unrealistic option).  She has, quite diligently (with a bit of dad’s advice) made sure she has strictly maintained the exact requirements for PSLF.  And perhaps that will happen one day.  Now, Dad could actually pay off those debts for her - but why should I?  It is likely that, through my tax dollars, I am going be helping to pay of EVERYONE’S student loans anyway.  So, Jared, in addition to all the other drawbacks you had so accurately chronicled with PSLF, the program has also succeeded in making “bad” parents and “bad” public citizens of some of the rest of us.

Hopefully (in my personal case) PLSF will work for my daughter as advertised, though there is definitely no guarantee.  If it doesn’t, daughter will be making a modest required minimum payment monthly - eventually out of her Social Security check - for the rest of her natural life.  Assuming things work out, an inheritance from me (dad) will make up for this.

(Of course, it is quite possible that John’s Great Debt Reset will have occurred by then, and/or my daughter will be able to repay her student loans in US dollars that by that time will be worth the equivalent to 1/10 of a bottle-top.  Daughter will probably have some of dad’s physical gold coins to help - but that’s another story ;-)

aoee1987@msn.com

Jan. 24, 9:52 p.m.

I like the way you think, Jared. I’ve pretty much always tried to pay cash or to get rid of a loan before it due if it were a purchase larger than I had the cash at the time. I equate paying interest on especially smaller purchases as a tax which limits my ability to do more with my resources. It a great investment though for for the one who is being paid the interest.
Dean Yoder
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jack goldman

Jan. 24, 1:14 p.m.

Legally counterfeiting debt should be a crime against humanity and was since the time of Hamurabi in Sumer. Debt always takes over any system, especially with lending ten times deposits. Bankers lend at 4% and collect 40%, lend at 18% and collect 180%, giving the public 1% or less interest. This is doomed to collapse the civilization as bankers turn Main Street into debt slaves. The traditional punishment for counterfeiting is death and this is why. Legal or illegal counterfeiting have the same effect, debt slaves, which destroy life. Currently the 1% are eating the 99% alive as debt slaves. This is child abuse. It has to stop. Jews were allowed to charge interest but Christians and Muslims were not. This is why Jews have an inordinate amount of power in today’s society. We should end legal counterfeiting and lending at interest. Legal debt notes are not money. Only gold and silver is real money. The debt slavery for children born as debt slaves is a crime against humanity. These debts need to be discharged as they were in Hammurabi’s time, with debt forgiveness to free up people’s incomes to buy good and services.

Jim Johnson 34645

Jan. 24, 12:39 p.m.

Somewhere in my dimmest memory there is this recurrent theme that keeping another’s money is theft.  Honoring your word is a requirement of living.  Simply you pay your debts.  And with this in mind, you don’t borrow with out the means to repay.  Indeed an old rule is that your house should not cost more than 2 1/2 times your wages. 
In the old days the first requirement of getting a loan was one’s character.  Today, with everything on line and sight unseen this is determined by ones credit reports.  Then there came “capacity” and “collateral.”

School debt.  I graduated with my MA in 1977 with no debt.  Ditto BA in 1966.  The GI bill helped but I worked at least 30 hours a week and every summer.  My son got his BSME in 2007, with no debt.  He worked (co-opted) every other semester.  I did loan him a pickup for the duration.  That was paid for a year after he graduated.

Of course if one managed to escape high school with no skills, look in the mirror.
jim johnson
greenfield, mo