Challenges with Public Service Forgiveness

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See capital onene. com for details Wcrom the New York Times, I'm Rachel Abrams and this is The Daily Today, as the cost of higher education has soared in recent decades, universities have attracted more scrutiny about the value of a four year degree Now The Trump administration is taking those questions to the next level with a new set of policies scale back the federal goverment's student loan program Today, I talk to my colleague, Ron Lieber, who writes about personal finance about what these new changes are and how they might reshape higher education in America It's Wednesday, july first So Ron, we have talked a lot on the show about how the administration has really focused on higher education. There have been concerns about anti Semitism on campus. The administration has accused a lot of different schools of being, as it describes to woke But you cover personal finance and you have been following a very different set of developments when it comes to higher education, which go into effect today, july first, so Tell us what has been going on Sure. So the federal government put into place Some changes to the way it lends money for higher education one point seven trillion dollars in student loan debt. and that's more than credit card debt. It's more than auto loans. And you'll probably remember that there was this giant pause in the repayment of student loans that happened at the beginning of the pandemic, but it went on for years. And since then, the Trump administration has been trying to revise the federal government's repayment plans to make them a bit stricter. And some of those changes went into effect today. So that's going to be a big change for families who are in the process of paying off student loans There's an even bigger change that the administration also put into place, which is that instead of focusing solely on canceling student debt or changing up their repayment plans, they are also trying to reduce the amount of loans that are given out in the first place. So what specifically Is the government doing to try to achieve that goal So two things are happening that just went into effect The first thing is that there are going to be on certain kinds of federal loans. First of all, there's this thing called the plus loan. Parents take that one out on behalf of their undergraduate students. Grandparents sometimes do it too And they do it when that student's financial aid package, if any, is not enough to cover the cost. And then there are the loans for graduate students. And up until this point, there have been very few limits on the amount of money that you can borrow. You borrow whatever you want up to the cost of a ance, which includes room and board, you know, it can be over a hundred thousand dollars per year, right And now Parents are only going to be able to borrow a certain amount of money per year and a certain amount of money over time through the entire process of completing a degree And then graduate students who are borrowing for themselves are gonna have a different set of caps. And I know that there are probably a lot of nuances here, but just really generally speaking, can you give us a rough idea of what the caps are for grad students and from the parents borrowing for their undergrad children? Yeah, so let's start with those parents. The cap is twenty thousand dollars a year for those federal loans that parents can get access to. And then the total limit over time might be four years, might be more, depending on how long the kid takes to sh through, that's sixty five thousand dollars. tal. which is not a whole lot if you consider the fact that some universities charge that just for one year of school. R So now over to those grad students. If you are in one of those standard master's degree programs or you other programs that are deemed non professional, you're limited to twenty thousand five hundred dollars per year and the aggregate total that you're allowed to borrow is one hundred thousand dollars And then there are so called professional programs. So those are things like business school, dental school Law school, medical school They're limited to fifty thousand dollars a year and two hundred thousand dollars over time. Got it And we should note that there is ongoing litigation over which of these graduate programs actually qualify as quote unquote professional and therefore would have that higher cap where people could borrow more Basically, the idea from the administration here is to keep students, keep parents from getting into a situation where they are borrowing essentially way more money than they can pay off. Right It may seem counterintuitive to hey, we're fixing the problem of higher education being too costly here by giving families less in federal loans to pay for the cost I think the idea here is to provide more guardrails to keep families from overextending themselves, and then that might drive down prices at least a bit How so Well, if parents and students can't borrow as much, it may make it harder for a lot of the schools to charge what they're charging now. So schools might need to lower their prices to match whatever it is that the families of the students can actually pay Okay, so you told us that two major buckets of changes were coming. What is the second? So the second big change, the government has said that it does not want to provide student loans anymore programs whose alumni meet a minimum earnings test. Okay, an earnings test, explain what that is and how it works. So here's the basic deal finish their undergraduate program There's going to be a measurement four years later And those folks from a particular program must on average earn more than the people in their state who only finished high school and are between the ages of twenty five and thirty four The basic bottom line is if you're not earning more than a high school graduate does, on average, what has the school done for you? And more to the point, why is the federal government subsidizing a degree that doesn't put you in any better financial position than a high school student? Is that the idea? Exactly earnings test, it will also be applied to advanced degrees and professional schools And in that case, the test is similar, but with different numbers. It will look at the earnings of alumni four years after graduation to see whether they earn more than the median salary for working adults aged twenty five to thirty four who have a bachelor's degree Can you give some examples of programs that might fail this test Well, I've been looking at a a pretty detailed data set of like over thirty thousand undergraduate majors at all sorts of different schools. So undergraduate religion degrees at a lot of schools may end up flunking the test a whole bunch of fine art schools with particular degrees and theater programs often end up at the bottom. Now, let's be clear here. there are not going to be any ramifications for any of this earning stuff for at least three years because the way the test is set up is that If a particular institution and its programs don't pass this earnings test two out of three years Only then will there be consequences And those consequences will be no more access to federal student loans. So the programs may not cease to exist at that point. But if a lot of people in those programs are borrowing a fair amount of money Those people are gonna have to figure out some other way to pay for it and the school's probably gonna have to help them So we said at the beginning of this conversation, it's no secret that the administration has targeted higher education in various ways. like, for instance, they threatened to cut off or did cut off hundreds of millions of dollars in federal funding to a bunch of different universities over the last year And I wonder whether we should be thinking of the changes that you are describing as a kind of continuation of that. effort L In other words, how much of everything you're describing is political and how much is purely financial? I don't know, Rachel, let's call it twenty three percent political, right? If you look at the Education depepartment fact sheet that's explaining the rules, it very specifically calls out schoolchs like the University of Southern California, in Los Angeles and New York University in New York. I don't think it's a coincidence that those institutions are in big blue cities. S But There's been bipartisan consensus for a really long time that the student loan program is deeply problematic. And the fact of the matter is that You know, these are taxpayer dollars here. And whatever the president may think, whatever Congress may think There are a growing number of people who are really mad about the amount of borrowing that is required to get this higher education stuff And they feel like there ought to be a way to control the price, right? And so it's possible that this is a medium sized step towards changing things. I mean, the more you talk about this, Ron, it actually seems kind of insane that this country ever devises a system where a family or a student could so easily borrow tens of thousands of dollars with basically no strings attached In retrospect, it seems that way, right? But we're talking about decades of history here began with some very good intentions Okay, so let's rewind the clock, then. why don't you tell us about how all of this got started and how we got to the point we're at today So nineteen eighty begins to become clear that a growing number of families were having trouble affording the last sp a couple of a thousand dollars each year for tuition, room, and board Now let's remember at the time, there weren't as many people going to college. There weren't as many low income people going to college, right? And the federal government Well, okay, if it's just a couple thousand dollars a year No big deal, right? We don't need to necessarily put a cap on the amount that people are borrowing. And we also don't really need to do all that much underwriting because these folks are decent credit risks and it's not a high volume of people and it's not a high volume of dollars. Right. So the sort of vetting that typically happens underwriting, when somebody borrows thousands and thousands of dollars, like making sure you can pay it back or you have a good credit score or whatever, you're saying that the federal government was not doing much of that. That's correct Flash forward another twenty five years or so. We're in two thousand five, two thousand six and the federal government pins. those loans to graduate students. And again, big idea here is, well, these are people getting master's degrees, they're getting professional degrees These people are really good risks as well. They're probably gonna to earn more. Surely they're going to earn more, right? And so there too There didn't seem to be any need for any severe restrictions As time went on A few problems began to emerge So first There are more and more people who are borrowing through these loan programs who are not necessarily the higher income earners that the government originally created some of these programs for There are more middle income families, working class families using those parent loans because more and more people start going to college And then the Dow tumbled more than five hundred points after two It's two thousand eight, two thousand nine, The Great recession comes along and these borrowers start running into some trouble. Student loans for college just keep climbing. No one expected the economy to take such a hit, leaving a lot of families scrambling. People are losing jobs and they cannot afford to make their payments. I'm currently making six loan payments every month, which essentially add up to a full mortgage payment And I was recently laid off, so and that's just a terrible look for the federal government This is bad And so the other thing that's happening here is as more and more people do borrow, more questions emerge about whether all of this debt is actually fueling rising prices that people are paying to go to these institutions And there begins to be some evidence that suggests that maybe those two things are connected Student loan debt has now surpassed card debt for the first time ever. And so twenty eleven rolls around and the Obama administration takes a look at all this and says, hey,, we need to try and rein this system in a bit Right? so that we have more certainty that the people who are borrowing can actually afford to pay the debt back over time. When a big chunk of every paycheck goes towards student loans instead of being spent on other things, that's not just tough for middle class families, that's painful for the economy. And so his administration tightened the underwriting And within a year or two, a whole bunch of institutions, including some historically black colleges and universities, were on the brink of going out of business. Wow borrowers were disproportionately affected here because they were borrowing a lot from this federal parent loan program and once they no longer qualified for new loans they could no longer afford those institutions. So what did the administration do They did what they felt like they had to do. and by twenty fourteen, they had essentially reversed the changes that they made and kind of made things go back to where they were before And so borrowing kept going up Part of the reason it did so is because some of the universities themselves We're gaming the system I'll be right back you by the Capital onene saaver card With Saver, you earn unlimited three percent cashback on dining, entertainment, and at grocery stores. That's unlimited cashback on ordering takeout from home, or unlimited cashback on tickets to concerts and games. So grab a bite. Grab a seat and earn unlimited three percent cashback with the Sver card Capital One. What's in your wallet? Terms apply. See capital onene. com for details. 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Learn more and get tickets at Guggenheim. org So Ron the moment in the story where the federal government has tried and failed with some kind of guardrails around education lending As you said, the problem kept getting worse. What's going on? So a couple of things are happening First of all, the schools and their strategy consultants are realizing that master's degree programs can be pretty profitable, right? If there are no labs involved or you know any expensive infrastructure on behalf of the schools, you can charge a lot of money if you can persuade students that their earnings will go up conclusion And we're very excited to introduce Master of Science in medical cannabis, science and Thrapeutics. Master's degree programs grow and they grow a lot. We are launching an exciting new O yearasters program The Master's in communication and media industry. The Master of prorofessional stududies in user experperience design. Online Masters of science and engineering in artificial intelligence. Our master's program in ennvironment and sustainability management, the world's first master's degree in happiness studies. So Robert Kelchin, you know, he's one of the most respected higher education researchers out there. He took a look at this and realized that there were fourteen thousand new master's degree programs wow that had been created in the last two decades leading up to the middle of this decade So the schools are really leaning into this, and it sounds like it is turning into quite a gravy train for them. Exactly, right? And if people feel like these programs and the vast majority of them were almost certainly marketed this way, if people feel like these programs are going to help them advance in their career There' going to be enough people who are willing to borrow a bunch of money from the federal government and essentially take the risk that their earnings are going to go up after they're done And do we have any sense of how much this growth in master's programs was actually benefiting students? Were these programs actually helping to supercharge what they would earn once they graduated, for example? Yeah, so the data back then wasn't as granular or widespread as what we have today. But there was definitely suspicion that at least some and maybe a growing number of those masters programs weren't really doing the job of helping people increase their you know, financial and earnings prospects Even for those programs that may not have been supercharging people's earnings, the universities started to find what became kind of a workaround for them. and that was the public service loan forgiveness program That was created in the two thousands. And in that program, if you go to work for a nonprofit or the government, what happens there is that if you do that job for ten years, the federal government will waive the rest of your student loan balance entirely once that period is over. They forgive it. It cancels that loan balance all together And so schools, they kind of start to get wise to this. And you start to see examples of those schools really encouraging students to make use of that public service loan forgiveness program. And that encourages people to sort of compartmentalize how much they're taking out, right? What the dollar amount will actually end up being at the end becausecause the debt just gets canceled in ten years, right. But it's worth noting here that it does not always go well for those students Sometimes they figure out years down the road that they actually didn't understand how the program worked or they were doing it wrong because they got bad advice. Maybe their job did not qualify or they didn't do the certification process correctly. There's a lot of paperwork here, or maybe they go into some kind of public service job and they hate it and they're either stuck staying there in some kind of job that qualifies for ten years in order to cancel the debt Or they don't do that, they go take a different job that doesn't qualify, and then they're stuck paying back a whole bunch of money. And while borrowers are not blameless, we have a systemic problem here with helping people understand the complexity that exists in America around money It's not really leading to great comes I wonder if you could give us an example or two of an individual person that stands out to you who has run into some kind of trouble like what we are talking about So the person I've written about more than anyone else in the pages of the New York Times is a guy named Jed Schaefer, who we refer to internally as sort of the patron saint of lost student loan causes. God. This is a guy who works with high school dropouts, some of them homeless and sets them up in a program where they learn life skills and get their GED So the exact type of job that might qualify for one of these public service loan forgiveness programs So Chad got got a master's degree so that he could do this work He borrowed a bunch of money and he thought he was doing the repayment correctly in order to get to the point where the loans would be wiped away through one of these federal programs. And it turns out it was a whole mess. Now, eventually he got it sorted out, but if he had not He would still be making large payments each month, I think to this day. and He'd be making those large payments at the same time that he was getting ready to send his own to college. I don't think that's what anybody had in mind thirty or forty years ago when we set all of these loan programs up in the first place. And so between the Grth in Master's programs and the schools basically encouraging teenagers, young people to throw caution to the wind, take out these enormous loans The problem has only gotten worse since the Obama administration tried to tackle it, right This brings us to this moment that we are currently in where the Trump administration is trying something new with these caps on loans and the earnings tests for these different programs. That's right Ron, you talk to university administrators all the time for your reporting about the cost of college, tuition specifically, et cetera, et cetera I am curious what you were hearing from them in this moment because I would imagine that they are not happy about some of these new changes coming from the administration Nobody wants the constraints on the market and the pool of available tuition dollars. And in fact, some of the professional schools in particular have pushed back and made equity arguments, right? They're saying that people with low incomes who are confronted with loan caps and are sort of foisted into other marketplaces for private student loans from a bank or Sally May or whatever, maybe they won't qualify depending on their program or depending on their credit or depending on their age And we may lose a whole bunch of people who we would have actually really liked. to be clinical psychologists or doctors or lawyers. That's one of the risks here But what do they say about the question about how much responsibility they bear for their alumni who might not be doctors or might not be clinical psychologists, for people that maybe don't have the obvious earning potential of those types of professional degrees? What do they say they view as their responsibility to be tethered to a student's earning potential frrankly, the outside world They try to say as little as possible and when backed into a corner, they say, look, we don't force people to take on debt the federal student loan program is available for a reason This is a matter of public policy. And we are making this education available to them at the price that we think is appropriate I do want to ask Ron, because you said earlier that the goal of all of these new efforts is to try to rein in cost of college, right? And also to make sure that college actually provides a return on this enormous investment that some people are making. Given the history that you've laid out here and also given how longstanding and complicated and intractable some of these problems have been, do you think there's any chance that these new policies being implemented by the administration could fix those problems depends on how things play out because there are many things that might Schools could just cut tuition right away. they could offer more in the way of financial aid. So you know, grants or scholarships that are really just coupons. And you know that brings the net cost down to the student But it doesn't lower the list price necessarily. Some schools might rely on the private student loan market. They might even get into bed with one of these lenders and say, hey, we'll guarantee the loans on the backnd because we think our students are amazing credit risks More people might just go to cheaper schools, right And then there is the unintended consequence, potentially, right? which is that a not small number of people just give up, throw up their hands, and they say, I'm not going to go at all I do wonder if there's another way of looking at this though, which is as a long overdue course correction. shuttering programs or schools or departments or whatever, that might only exist because there was money there to fuel them and not necessarily because they serve the students or civic society It could also maybe redirect some students who might be better served by not going to school. So I just kind of wonder like how you are weighing all of this and how you are thinking about sort of the net benefits and the net consequences. I am rooting for to become way more informed about data that exists now around what you'll earn if you get a particular major or what you'll earn if you go to a particular graduate degree program I'm not saying that we need to put all the PhD programs in history out of business or that know private universities should stop offering, you know expensive master's degrees in social work But what I am saying is that Everybody who's shopping for higher education, deserves way better answers and way more data when they come to the institutions with questions about why this costs more than that competing institution down the street by twenty or thirty thousand dollars a year. or why this master's degree that did not exist five years ago actually offers me something that will make me smarter, that will build my network, and that will advance my career When there's a change in public policy that alters the marketplace, it's an opportunity for consumers to pause and say, huh There's a change that's happened here. It's supposed to be for my benefit What questions am I not asking could make me more informed you are rooting for more transparency and for people to be having more honest conversations about what the value of going to school is. Yes, please talk more, ask better questions. We are entitled to better answers to these questions from the institutions