Think tanks, CBO dramatically overestimated the direct budgetary costs of Public Service Loan Forgiveness (Michael Simkovic)

I've previously noted some of the outrageously implausible assumptions used by organizations with links to private student lenders (such as the New American Foundation, AEI, Brookings, Manhattan Institute, and Barclays) in an apparent effort to portray federal student loans as a threat to the public fisc. Such studies have been used to justify increases in federal student loan interest rates, credit rationing (borrowing caps), and a less accommodative policy with respect to income based loan forgiveness.  

A new government report suggests that these groups may have also over-estimated the costs of Public Service Loan Forgiveness (PSLF).  PSLF is distinct from income-base repayment programs (IBR).  Whereas IBR is intended as insurance for student loan borrowers against relatively low earnings persisting over the course of a 20 year period, PSLF is intended as a wage subsidy to encourage highly educated skilled workers to accept public sector and non-profit jobs and continue to work in them for at least 10 years.  

Early estimates had wildly exaggerated the cost of PSLF, assuming that 25 percent of student loans would be discharged through these programs within 10 years, since at any one time around 25 percent of the workforce works in the public sector.

There are numerous problems with this estimate: graduates transition in and out of the workforce; graduates move between the private and public sectors; not all public sector work qualifies for PSLF. It will therefore take far more than 10 years after graduation for many borrowers to accumulate a sufficient period of time working in qualifying public sector jobs before they can earn forgiveness.  During this time period, borrowers continue to make student loan payments, decreasing the budgetary costs of eventual debt forgiveness.  The eligibility and documentation requirements for PSLF are also stringent, further disqualifying many applicants.

According to the government report noted above, in the first year in which graduates could potentially qualify, only 28,000 borrowers applied and only 96 (less than 0.5%) qualified for forgiveness.  28 percent of applications were disqualified for missing information, while over 70 percent were disqualified because they had not yet met the program eligibility requirements.

The total balance forgiven in the first half of 2018 was $5.52 million dollars. The CBO, relying in part on assumptions advocated by think thanks, had estimated that the program would cost $425 million in 2018, and nearly $24 billion within 10 years. 

While qualifying applications are likely to grow in the coming years, the contrast between the high estimated cost and the low actual cost thus far is striking.