"Teoria" by Eduardo Basualdo at the Frieze Art Fair in London, October 16, 2013. REUTERS/Andrew Winning
The federal Public Service Loan Forgiveness (PSLF) program broadly attempts to reward students who work for the government or non-profits, if they are unable to meet payment amounts given the generally lower compensation for these roles than private sector jobs. Because of design flaws, however, many people earning substantial sums will be eligible for hundreds of thousands of dollars in student loan forgiveness.
PSLF allows people in “qualified professions, ” including the government and 501(c)3 non-profits, to receive tax-free forgiveness of their remaining federal student loan balance after 10 years of making eligible payments on an income-driven plan, which caps monthly payment at 10-15% of discretionary income. The WSJ detailed last week what some financial planners refer to as the “doctors’ loophole” in PSLF, which will enable doctors and other graduates in lucrative fields that often require expensive graduate education funded by student loans, to get six figures’ worth of loans forgiven despite strong earnings.
This “loophole” is actually simply the lack of any limits on the amount of loan forgiveness available. Since medical school students graduate with an average of $180, 000 in student loans, and many go to work for non-profit hospitals or other qualifying employers while making little in their first years of employment, they can position themselves for substantial forgiveness if they structure their first 10 years out of school wisely. Anyone who borrows heavily for undergraduate or graduate study can receive these benefits, and the amount they receive is dependent on their compensation relative to their loan payments.
The White House is attempting to cap the benefit from PSLF at $57, 500, which would likely retroactively affect people who have been counting on the benefit since it was announced in 2007. The first PSLF benefits are set to be awarded in October 2017, and Gradible’s proprietary research and data indicates an annual forgiveness benefit of $300 million in 2017, increasing to $2.8 billion in 2027 and a total of $13.5 billion in its first decade of operation.
The critical question is whether these benefits are actually helping struggling borrowers, or merely subsidizing the expensive education of professionals who receive substantial lifetime compensation in return for their personal investment. Will Congress and the White House allow the six-figure student loan loophole to remain open? It’s sure to be a contentious part of the broader election year debate over the future of the student loan problem in the U.S. If you are interested in learning if you qualify for Public Service Loan Forgiveness and what your benefit might be, you can take Gradible’s free student loan evaluation to find out.