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When you can max out student loans — and not have to pay it all back

(Photo from Flickr user <a href="" target="_blank">Light Brigading</a> under Creative Commons license)

Programs that set student loan payments based on a person’s income and offer loan forgiveness after a certain number of payments are meant to encourage people with college debt to choose jobs based on the merit of the work and not the size of the paycheck.

But they may offer an unintended benefit for people going into public sector or nonprofit jobs — the ability to borrow more heavily than is necessary for a degree without having to pay it all back.

A paper released Wednesday by the New America Foundation argues that many students planning to take public sector jobs, especially those earning graduate and professional degrees, can see a large chunk of their debt forgiven by the income-based repayment (IBR) program. In some cases, the debt forgiven can amount to most of the cost of a graduate degree, says Jason Delisle, lead author of the report.

“If they think they’re going to end up working at a nonprofit or for the government, then they should borrow as much money as they can get their hands on,” Delisle says, “and go to whatever school they want to go to. ”

People could use student loan money for any number of expenses beyond tuition: to cover rent, books, food, travel or even car payments. So those who borrow more than they need to could milk the benefit, he says.

Here’s how the program works: People who sign up for IBR would make monthly payments based on how much they make, not how much they borrowed. So if they end up in low-paying jobs, and receive loan forgiveness on top of that, they may see much of their total debt load discharged.

Forgiveness can be more generous for borrowers who take qualifying jobs in the public or nonprofit sectors because they would be eligible to have their debt forgiven after 10 years of payments. For instance, a social worker earning in the 75th percentile would be responsible for the first $28,000 in loans, even if they took out the typical debt load of $49,000 — before interest– according to the New America Foundation.

People who make more will pay more. For a lawyer whose earnings are in the 75th percentile, the tab would be larger, adding up to about $117,000, compared to the median debt load of $140,000.

Most people with federal loans will qualify for IBR, which limits payments to roughly 15 percent of their income, after subtracting an exemption that is based on the federal poverty level, and forgives debt after 25 years of payments. People with direct loans taken after October 2007 will qualify for a program that limits payments to about 10 percent of income and offers forgiveness after 20 years of payments. (If the payment required under the standard 10-year repayment plan is smaller than the income-based amount, then borrowers would pay that.)

The programs apply only to federal loans, meaning that people who also have private student loans would only be able to have the public loan portion of their debt forgiven. (Required payments would be 10 or 15 percent of income after the exemption, or the regular payment amount under the standard 10-year repayment term — whichever is smaller.)

People with graduate degrees may get the biggest benefit out of the program, Delisle says, because they can take out more in federal loans. There is a lower cap on how much people can take out in federal loans for an undergraduate degree.

Of course, millennials seem especially averse to piling on more debt. That said, many will probably try to minimize their debt loads on the chance that plans change after graduation. People who later land lucrative jobs or decide against joining the public sector could then be on the hook for most, if not all, of their bill, says Lauren Asher, president of the Institute for College Access & Success, a nonprofit that works to make college more affordable.

People’s plans may change after an illness or a major family event, Asher says. Some people may intend to work in a low-paying field but then see their household income jump if they marry someone who makes much more, she adds.

It’s also worth noting that people with graduate degrees, who tend to have larger debt loads, also make more on average than people with only undergraduate degrees, which could minimize the benefit they get out of the program, Asher says. “No one can know for sure what their job or earnings will be in the future,” she says.

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