Student Loan Forgiveness Loophole Foreshadows Looming Crisis

A federal program that will soon forgive billions of dollars in student loans illustrates the ineptitude of government planning and foreshadows bigger problems down the road.

The Public Service Loan Forgiveness (PSLF) Program erases the balance on student loans after the debtor makes 120 monthly payments while working full-time for a qualifying employer. The program was designed to incentivize graduates to go into relatively low-paying public service jobs such as public defender, social worker, and public health provider.

But as the Wall Street Journal reports, a loophole will allow thousands of high-paid workers to dump their student loan debt:

The program is encompassing far more workers than envisioned, many of them well-paid. Thousands of workers with pricey graduate degrees are on track to discharge five- and six-figure debts on their way to typically lucrative careers, according to enrollment figures and financial advisers. The biggest beneficiaries will be medical-school students, who owe on average $180,000 upon graduation and are increasingly working for nonprofit hospitals and gaining eligibility for the program. Financial advisers estimate that many will have 80% or more of their original balances forgiven under what some are calling a ‘doctors’ loophole’ in the program.”

Retired Columbia University finance professor Gailen Hite said the program won’t even help those who need it most, such as college dropouts owing smaller sums:

We’re subsidizing people who are going to be well-off, better than middle class. I could understand maybe poor people, disadvantaged people—somebody who isn’t going to be making a quarter of a million dollars a year.”

According to the US Department of Education, about 295,000 borrowers in all fields have submitted paperwork under PSLF so far. The agency projects some 600,000 borrowers will have their debt forgiven under the program over the next 10 years.

The government hasn’t released an official estimate of how much money is involved, but it will likely be “billions of dollars.”

Of course, this is just a drop in the bucket compared to the total federal student loan bill of more than $1.3 trillion, increasing at a rate of about $2726.27 per second. But the forgiveness program is a microcosm of a far bigger problem on the horizon.

If forgiving 600,000 student loan debtors under an ill-conceived government program is a cause for concern, what is going to happen if a federal court decides to allow for the discharge of student loan debt through bankruptcy?

Some 7.5 million student debtors are now severely behind in paying back their loans. As Hite’s statement indicates, pressure to help these people will only increase as time goes on. Just recently, the Department of Education authorized more than 80,000 students to seek loan forgiveness after an investigation into the advertising practices of Corinthian Colleges. According to investigators, the company enticed students into accumulating huge debt with false promises of jobs.

While the company sold its schools using outright lies, the promises weren’t all that much different from those the education establishment and government sell to students every day.

It’s important to remember that when the government forgives these loans, they don’t just disappear from the face of the earth. The taxpayers are ultimately on the hook for all of this debt.

The PSLF illustrates the government’s ineptitude. In its effort to incentivize one preferred behavior, it has basically provided a free ride for many who don’t need it. On a larger scale, we see similar perverse unintended consequence in the government’s overall drive to send every American to college. That’s one of the factors driving the student loan bubble in the first place.

But the PSLF debacle also foreshadows the looming crisis that this mounting student loan debt will precipitate. The impetus to “help” those burdened by student loan debt will only grow. The PSLF loan forgiveness program is likely just the tip of the iceberg.

Ultimately, the student debt bubble will impact US markets and average Americans. You can learn more, and how to prepare yourself, in SchiffGold’s white paper The Student Loan Bubble: Gambling with America’s Future. Get the free download HERE.

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