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Important notes on loan forgiveness

Charles Rice | Tuesday, October 30, 2007

Borrowing students ought to note the College Cost Reduction and Access Act, signed into law on Sept. 27. Georgetown Law Professor Philip Schrag analyzes the Act in the Fall 2007 Hofstra Law Review, available at www.capenet.org/new.html.

“Congress,” notes Professor Schrag, “significantly reduced the period (10 years rather than 25) after which public servants’ educational loans were partly forgiven. It also reduced monthly payments for all high debt/low income borrowers … with a new ‘income based’ repayment (IBR) program.”

Borrowers with eligible Federal Direct Loans will have the unpaid balance of principal and interest forgiven after they have made 120 monthly payments after Oct. 1, 2007, provided that all of those payments have been made while the borrower was employed in a “public service job.” Employment in such a job does not have to be for 10 consecutive years nor does it have to be with the same employer. But the borrower has to be so employed at the time the loan is forgiven. A public service job is defined as:

“A full-time job in emergency management, government, military service, public safety, law enforcement, public health, public education (including early childhood education), social work in a public child or family service agency, public interest law services (including prosecution or public defense or legal advocacy in low-income communities at a nonprofit organization), public child care, public service for individuals with disabilities, public service for the elderly, public library sciences, school-based library sciences and other school-based services, or at an organization that is described in section 501 c (3) of the Internal Revenue Code of 1986 and exempt from taxation under 501 (a) of such Code; or

“Teaching as a full-time faculty member at a Tribal College or University as defined in section 316 (b) and other faculty teaching in high-needs areas, as determined by the Secretary.”

The Act defines an “eligible Federal Direct Loan” as “[a] Federal Direct Stafford Loan, Federal Direct PLUS Loan, or Federal Direct Unsubsidized Stafford Loan, or a Federal Direct Consolidation Loan.”

A borrower with government-guaranteed loans that are not federal direct loans may consolidate such loans into a Federal Direct Consolidation Loan that qualifies for the loan forgiveness program. A federal “direct” loan is made by the U.S. Department of Education as the lender. Loans that are not already guaranteed by the federal government are not eligible for consolidation and eligibility for loan forgiveness.

Effective in July 2009, borrowers of most government-guaranteed loans, including Stafford and Grad PLUS loans, can reduce their monthly payments of principal and interest if they qualify, by reason of “partial financial hardship,” for the new “income-based repayment” option.

Professor Schrag recommends that borrowers consolidate non-qualifying government-guaranteed loans into federal direct loans and then reduce their monthly payments by using the current income-contingent repayment plan and, when it becomes available in July 2009, the income-based repayment plan if they qualify for it. According to Schrag, a borrower who has $100,000 in college loans and who works in a “public service job” with a starting salary of $40,000 and annual salary increases of 3 percent could have more than $125,000 in principal and interest forgiven under the combined programs at the end of 10 years of public service.

The Act will benefit some student borrowers. It remains true, however, that whenever you see a problem that cries out for a government solution you should look for the government program that caused the problem in the first place. As Professor Gary Wolfram concluded in his Cato Institute study in 2005, “both theoretical analysis and empirical evidence indicate that the federal government’s financial aid programs cause higher tuition costs.” That conclusion applies to the research universities, including Notre Dame, which have financed their quest for research greatness on the backs of students who could pay the rising tuition only by borrowing. Student borrowing has about reached its realistic limit. The new Act offers an out through the IBR reduction of payments for high debt/low income borrowers and through loan forgiveness for grads who spend 10 years in a “public service job.”

The Act, however, also gives to the striving research universities an enhanced ability to raise tuition. Those who can afford to pay that tuition will do so. Non-wealthy students can borrow and now they can use the Act to pass much of that cost on to the taxpayers.

Notre Dame makes commendable efforts to reduce borrowing by students. And University-financed loan-forgiveness programs, such as the Law School’s Loan Repayment Assistance Program, are helpful. Neither such University efforts nor the new Act, however, lessen the urgency of Notre Dame’s adoption of the Princeton no-loan program, in which all students who would otherwise have to borrow have their needs met by University grants. Notre Dame ought to set an example of using its own resources to remove the crippling debt burden from its students. Nor should Notre Dame exploit the new Act by further raising tuition and using the new Act to pass the costs of research greatness on to the taxpayers.

Professor emeritus Charles Rice is on the law school faculty. He can be reached at [email protected] or 574-633-4415.

The views expressed in this article are those of the author and not necessarily those of The Observer.