Kill public service loan forgiveness and pay public servants more

The White House recently announced changes to the Public Service Loan Forgiveness (PSLF) program, which subsidizes borrowers working for the government or in the nonprofit sector, to make it available to more borrowers and more generous to others.

Normally, I find myself objecting to expansions of eligibility for loan forgiveness and repayment subsidies — but there isn’t a lot to dislike here. The in-the-weeds fixes expanded benefits and now the program includes borrowers who probably should have been included in the first place.

My problem with the fix, though, is that it does not go far enough. Yes, PSLF has worked poorly, but that’s no different than every other income-driven repayment program. The legal and regulatory framework that established these programs is a mess and needs an overhaul, but the problems with PSLF run deeper. 

PSLF simply should not exist.

I want public dollars to support undersubscribed professions that contribute to social good, but I think delivering subsidies through an already convoluted student loan program is a terrible way to do it. We should be subsidizing the work these people do, rather than the borrowing that got them there. Let’s pay these critical professions more, either through heightened wages for public employees or tax credits for those in the private sector. There are three main reasons why cash transfers of wage increases would be superior to the status quo. 

First, it would allow us to more effectively target these dollars to professions that are actually undersubscribed and contributing to the social good. While most news coverage of PSLF highlights that it benefits teachers, nurses, firefighters and the like, the program also extends eligibility to people like me who, by all measures, make a comfortable living in the nonprofit sector. Not to mention, there are many people, especially those on the political left, who would argue that my work doesn’t make the world a better place. My profession is far from the only example of this dynamic. Just imagine all of the comfortably paid lawyers working at advocacy organizations — you can probably think of a few who do not need your tax dollars.

Also, tax credits or wage increases would allow us to incentivize all workers to join undersubscribed professions, not just those workers who are sitting on mountains of student debt.

Second, it would more effectively reward and incentivize work in undersubscribed professions. The challenge we face, and that PSLF presumably was designed to address, is that there are professions that are important for our society that are undersubscribed, meaning we have fewer people doing the job than would be socially optimal. Sure, the existence of PSLF might encourage some new workers to enter those professions, but that would require that these people were aware of the PSLF program and could anticipate the benefit that would await them when they became eligible. Surely some individuals are this forward-thinking, but not all will be.  Putting cash on the table — for all workers and not just those with student debt or who can commit to 10 years of public service — almost definitely would provide a more salient incentive and would more effectively fill those vacancies.

Finally, PSLF creates significant distortions in the incentives to borrow for college and graduate school that exacerbate both tuition inflation and out-of-control borrowing. If a borrower is aware they likely will not have to repay their loans beyond a certain threshold — as is often the case when a borrower anticipates working in a PSLF-eligible occupation — the economically rational thing to do is to borrow as much as you can. That can mean borrowing to finance higher living expenses or even going to a higher cost institution. And the cost of all of that falls back on taxpayers who are on the hook to finance loans forgiven through PSLF.  

PSLF is a mess — even more of a disaster than most of its vocal critics realize. We certainly need to fix the student loan repayment infrastructure, but repairing PSLF should not be a part of that effort. Instead, take the dollars we would have spent on PSLF and hand that money out to workers benefitting the social good through higher wages or tax credits. And let’s debate exactly who that would be.

Beth Akers, Ph.D., is a resident fellow at the American Enterprise Institute and former staff economist with the Council of Economic Advisers during the George W. Bush administration. Follow her on Twitter @DrBethAkers.