Unfair Favoritism? Yes
Insulting to Taxpayers? You Bet
But the Harmful Effects are Much Deeper
by The Editor
“Borrowers who devote a decade of their lives to public service should be able to rely on the promise of Public Service Loan Forgiveness.”
U.S. Secretary of Education Miguel Cardona, Oct. 6, 2021
Introduction
Democrats are very fond of government programs to forgive student loans, but they especially love schemes that direct lucrative government handouts to “public servants.” This favoritism is evident when looking at the income-based loan forgiveness schemes currently in place for new borrowers inside and outside of the public sector. Private sector workers have to pay 10% of their income for at least 20 years before they can receive forgiveness on their student loans. But for public servants, the deal is much better. The special program for public servants also requires they pay 10% of their discretionary income, but they will have their student loans forgiven after only 10 years.
This special treatment for public servants seems unfair to private sector workers. It’s kind of like getting a bicycle for Christmas while your sibling gets a new car. So, what’s driving this discriminatory program? There are a variety of motivations, none of them good.
Overview of the Public Service Loan Forgiveness Program
The Public Service Loan Forgiveness Program (PSLF) was established in 2007 to provide forgiveness on certain direct federal loans for borrowers who have made 10 years of qualifying monthly loan payments while working full-time for U.S. federal, state, local, or tribal governments or for qualifying not-for-profit organizations.
Originally, the PSLF program was restricted to borrowers that had elected an income-based repayment program, a scheme which limits a borrower’s legal repayment obligations to between 10% and 15% of their discretionary income. When this program was launched, borrowers who had chosen traditional loans with fixed repayment schedules were not eligible.
But like most government programs, this one expanded over time. In October of 2021, the U.S. Department of Education (DOE) announced a range of changes to significantly ease the requirements for loan forgiveness under the PSLF program, including expanding the types of loans which are eligible to include all direct federal loans, not just loans covered by income-based repayment programs.
In addition, the DOE expanded the definition of what would count toward the requirement for 10 years of loan payments, including relaxing the original rules that required borrowers make loan payments on time to qualify for forgiveness. As described on the studentaid.gov website: “Under the new rules, any prior payment made will count as a qualifying payment, regardless of loan type, repayment plan, or whether the payment was made in full or on time.” As a result of these modifications, the DOE estimated that more than 550,000 borrowers would benefit from an increase in the number of loan payments qualifying under the PSLF, with the average borrower experiencing an increase of two years of progress towards eligibility for forgiveness.
Congress has also established four slightly different income-based repayment (IBR) plans that are available for borrowers who work in the private sector, but with much less generous terms than the PSLF. When this program was set up in 2007, it required private sector borrowers to pay 15% of their discretionary income for 25 years. In 2014, the government softened the terms for some new borrowers, lowering required debt payments to 10% of discretionary income with debt cancellation after 20 years. Still, the options for private sector borrowers were much less attractive than the PSLF program in which public sector workers could be eligible for debt forgiveness after only 10 years.
All of this adds up to a pretty sweet deal for public sector workers, but it gets even better for them. Loan forgiveness received by borrowers under the PSLF is not taxable. Private sector borrowers are not so lucky. Any forgiveness they receive on their student loans is taxable, just like the forgiveness of other types of debt like mortgages or car loans.
The PSLF is Poorly Designed
In addition to its inherent unfairness, the PSLF program suffers from design flaws. First, the PSLF definition of “public servant” is not even limited to government workers. Rather, the definition is so broad it includes anyone working for a 501(c) (3) not-for-profit organization. There are over a million of these types of organizations in the United States, so this significantly increases the number of individuals eligible for student loan forgiveness under this program. This raises some curious inconsistencies in outcomes. For example, a teacher at a public school would qualify while a teacher at a private for-profit school would not.
Another design problem in this program is that its short tenor weakens the logic behind IBR plans. The basic concept underlying these plans is for the government to function like a partner of the borrower – taking less in debt payments when incomes are low (early in a borrower’s career) in exchange for receiving more when incomes are higher (later in a borrower’s career). This theory is weakened if borrowers aren’t required to keep making loan payments long enough to progress to their higher earning years. In this regard, the longer tenor of the private sector IBR plans is much more consistent with the foundational principles of income-based repayment plans in general.
The PSLF program also suffers from the disadvantages that plague loan forgiveness proposals in general. Loan forgiveness giveaways disadvantage people who don’t have outstanding student loans, including those who worked their way through college, borrowed money from their parents, chose to attend less expensive colleges, or missed out on college altogether. Furthermore, there is no means testing in the PSLF, so a significant portion of the value goes to people who are not needy. In fact, because college graduates are generally better off than the average American, a significant amount of the benefits of this program are directed to wealthier-than-average individuals. This is a very bitter pill for the American taxpayer to swallow. Also, this program does nothing to address the underlying causes of excessive student borrowing.
What’s worse than the PSLF Program? The motivations behind it
Why do some politicians go to such lengths to direct these valuable benefits to public servants? There are several motivations, all with serious drawbacks. The one most often cited publicly by PSLF proponents is that these workers somehow deserve extra payoffs because of all the sacrifices they make by working in the public sector. This rationale does not hold up upon examination because public sector workers already have significant advantages relative to private sector workers, often including higher wages, more generous benefits, enhanced job security, and more predictable promotions.
Public sector workers are a diverse bunch, but here are some data points that illustrate how they are often better situated than private sector workers:
- In a 2017 study, the Congressional Budget Office examined the 2.1 million employees in the federal government and found they received 17% more in total compensation (including benefits) than similar workers in the private sector with comparable qualifications.
- A similar dynamic is evident when looking at the much larger group of 16.4 million state and local government workers. For this group, the Bureau of Economic Analysis found they received 16% more in total compensation in 2020 than workers in the private sector.
- Defined benefit plans are a significant driver of the lucrative compensation packages enjoyed by public sector workers. In 2019, 86% of state and local workers had access to defined benefit plans while only 16% of private industry workers did. Also, public sector workers generally have access to better health care plans than private sector workers.
- Public sector workers have a high degree of job security while private sector workers are much more exposed to the ups and downs of the economic cycle and the performance of their individual employers. This can be seen by looking at the level of layoffs and discharges in the public sector, which is less than one-third of that in the private sector. In addition, public sector workers often get wage increases based on pre-set schedules and receive promotions in a lockstep manner.
So, the trope of the long-suffering public sector worker does not stand up to scrutiny. The combination of generally higher compensation, enhanced job security, more stability in pay, and greater predictability of promotion results in a much more attractive employment proposition for public sector workers relative to private sector workers. This is demonstrated by the fact that public sector workers stay in their jobs to a much greater extent than private sector workers. This can be seen in the quit rate for government workers, which is consistently less than half the rate for private workers.
But perhaps the most powerful motivation behind the PSLF is the most pernicious. Fundamentally, the PSLF program is an effort on the part of certain politicians to secure the political support of those who stand to benefit. And because these types of politicians never tire of commandeering taxpayer money to fund their vote-buying schemes, you can rest assured the long-term plan is to use the PSLF as a beachhead to further expand similar types of giveaways. We can already see this strategy of incrementalism at work, most recently in 2021 when the DOE significantly expanded the scope of this program.
This is a strategy commonly used by big government politicians. The general idea is to choose a certain subset of individuals and give them preferential treatment as a way of buying political support. In the selection process, priority is given to groups that can most easily be portrayed in a sympathetic light, even if that characterization is misplaced. Getting a proposal like this through Congress is made easier because the plan can be presented as relatively limited, at least in the beginning. Eventually, the plan is broadened in a self-reinforcing feedback loop. Politicians use the program to buy political influence which is leveraged into expanding the group of beneficiaries who become more numerous, politically powerful, and better positioned to defend the program.
Conclusion
The PSLF program is a highly valuable benefit for public sector workers. Private sector workers must wonder what makes public sector workers deserving of this special treatment. Advocates of loan forgiveness for public sector workers like to paint the recipients as noble martyrs who deserve rewards for all their sacrifices for the public good. Upon examination, this portrayal is very misleading. In fact, a comparison of workers in the public sector versus similar workers in the private sector indicates that public sector workers often have higher compensation, more job security, and greater predictability of promotions. The handouts from the PSLF program only serve to exacerbate the advantages enjoyed by public sector workers. This cynical favoritism is a deeply unfair insult to the Americans who are excluded from this giveaway even as they foot the bill as taxpayers. Every worker is deserving of respect, and public servants are no more meritorious than private sector workers.
Why then would politicians devote scarce taxpayer resources to such a flawed program? Their motivation is part of a two-pronged strategy. First, trade loan forgiveness for the political support of a favored group. Next, use the initially narrow program as a launching pad from which it can be incrementally expanded. This becomes an ever-expanding cycle of vote buying as politicians use the political power emanating from the beneficiaries of the plan to continually broaden the scope of the program. In this process, ordinary citizens find that their tax payments are being used against them. Not only are taxpayer resources unfairly directed to politically favored special interest groups, this is done in a way that is corrosive to the democratic process.