The Surprising Side Effect of Student Loan Forgiveness Programs

Published

October 22, 2014

Christine DiGangi is the former Deputy Managing Editor - Engagement for Credit.com and covered a variety of personal finance topics. Her writing has been featured on USA Today, MSN, Yahoo! Finance and The New York Times International Weekly, among other outlets.

As more people learn about and use public service loan forgiveness and income-based repayment plans to make student loan payments more affordable, the U.S. could run into an economic issue. Such loan forgiveness programs incentivize borrowing, according to a recent report from New America Education.

The report authors, Jason Delisle and Alexander Holt, analyzed debt and income data of consumers who qualify for public service loan forgiveness and income-based repayment plans enacted in 2010 and 2012. They conclude that under these programs, many graduate and professional school students are unlikely to fully repay their loans, even if they earn salaries placing them among upper-income Americans. Knowing they don’t have to entirely pay, students may borrow more, without reservation. Universities may then hike the prices, knowing students will borrow to pay the tuition, particularly for certain degrees.

Well, that doesn’t sound good, does it?

Think about it: Universities will put hefty price tags on certain degrees, and students borrow that large amount of money, knowing that after a certain number of years in a particular career and a track record of on-time loan payments, they won’t have to repay everything they borrowed. The government takes care of it, but where does that money come from? Taxpayers, probably.

It’s good the government recognizes that higher education is sometimes an unbearable cost, given the price tag on some degrees and the earning potential in related careers. What this study highlights is that loan forgiveness programs can potentially reward over-borrowing and penalize graduates who don’t go into public service jobs. It seems the loan forgiveness programs recognize how some degrees have become unaffordable, but they don’t address the root of the problem: rising costs of higher education.

For students whose earnings are exceptionally insufficient for supporting student loan payments, loan forgiveness can be a lifesaver. As the analysis points out, a lot of people earning plenty of money may still benefit from loan forgiveness, which shows these programs may not be sustainable without revision. There’s certainly a place for loan forgiveness, as long as it doesn’t worsen the issue of high tuition costs.

Student loan debt can be a major drag on your day-to-day finances as well. Your credit score can suffer if you can’t make your monthly payments. You can see how your student loans are impacting your credit scores for free on Credit.com.