Personal Finance

Cost to taxpayers on loan forgiveness could skyrocket

A program to encourage student-loan borrowers to go into public service may come with a hefty price tag.

If you take out a federal student loan, you may qualify for public service loan forgiveness. (If you borrow from a private lender, you are not eligible for the program.) Some qualified borrowers will be able to use this benefit starting next year. The ultimate cost of the program is difficult to determine.

Since 2012, borrowers could certify with the Department of Education that their employment would qualify them for public service loan forgiveness. The number of borrowers who have been certified by the department has grown rapidly, to 431,853, as of June 30, 2016 (see chart below).

"This is not a small-scale program, and borrowers enrolled in it have some of the highest levels of student loan debt," said Jason Delisle, a resident fellow at the American Enterprise Institute, a conservative think tank.

The median debt load of those enrolled in public service loan forgiveness is more than $60,000, and nearly 30 percent of people who have been certified for the program have borrowed more than $100,000, according to a recent analysis Delisle did for the Brookings Institution (see chart below).

One problem with controlling the costs of public service loan forgiveness is that the Department of Education has an open-ended definition of what public service is, Delisle said.

The Government Accountability Office estimates 25 percent of U.S. workers are employed in jobs that could qualify them for public service loan forgiveness if they have student loans and know about the program.

Public service loan forgiveness was created in 2007. To qualify, borrowers have to make 10 years of on-time payments and work for an employer the Department of Education deems to be serving the public good. Qualified employers include local, state and federal government agencies and nonprofit organizations.

Unlike loan forgiveness under income-based repayment plans, public service loan forgiveness is tax-free to borrowers.

"The program largely benefits highly educated borrowers with graduate degrees," said Alexander Holt, an education policy analyst with New America, a nonpartisan think tank. Holt has also co-authored papers with Delisle on public service loan forgiveness.

Take, for example, Delisle's and Holt's research of a typical lawyer who enters into public service. That lawyer would have a starting salary of $59,000 and an average debt load of $140,000. By year 10, that lawyer would make $121,000 annually and have paid off $49,000 in student debt under an income-based repayment plan. Because interest keeps accruing and payments under income-based repayment don't always cover the interest cost, the average public service lawyer would have $147,000 of loans forgiven tax-free.

The Obama administration has proposed capping public service loan forgiveness at $57,500 for all students. That is more than what Congress has provided for nearly all other student loan forgiveness programs and more than what low-income undergraduates can receive in Pell grants, Delisle said.

The Congressional Budget Office estimates that a cap on public service loan forgiveness could save the federal government $5.4 billion over 10 years. Congress has ignored Obama's proposed cap to public service loan forgiveness.

Supporters of public service loan forgiveness argue that the program allows borrowers to pursue lower-paying careers, such as being a public defender, teacher or social worker, that benefit society.

"The country is getting a bargain with public service loan forgiveness," said Mark Kantrowitz, publisher and vice president of strategy at, which connects students with colleges and scholarships. "As a society, it is a lot cheaper to provide loan forgiveness for people who want to pursue public service than pay them higher salaries."

The true cost of public service loan forgiveness won't be known until borrowers' student debts are canceled. The first ones will be eligible for forgiveness in October 2017.

Don't worry if you're a borrower counting on public service loan forgiveness. Any changes to the program would likely affect future borrowers, not current ones, Kantrowitz said.