The Problem with Federal Loan Forgiveness Programs

One of the Education Department's top higher education officials says there are significant problems with two of the most-trumpeted new loan forgiveness programs designed to help students afford college.

The public service loan forgiveness program that will begin in 2009 makes good headlines, Diane Auer Jones, assistant secretary for postsecondary education, told attendees of a Washington, D.C., College Savings Foundation conference this month. But many idealistic students hoping to get out from under their federal education debts will be sorely disappointed, she says.

"Guess what? You have to make 10 years of payments," before the remainder of the loan is forgiven, she notes. And most federal education loans are 10-year loans, which means there will be nothing left to be forgiven.

The Education Department is worried "some students will see the program and take on more debt than they would have otherwise, not realizing it is unlikely that most of it will be forgiven," she says.

In addition, the new "Teach grants" that this year started paying up to $4,000 a year to those studying to be teachers in needy schools will turn into costly mistakes for the vast majority of recipients, she says. Teachers who do not end up working in classrooms that qualify as "high need" will see those grants they received while in school turn into loans. Jones says the Education Department's experience with other similar programs indicates 80 percent of the recipients of Teach grants will have to pay them back with interest. The problem, she says, is that newly graduated teachers are having trouble getting hired by what she called "dysfunctional" but needy schools.

Robert Shireman, director of the Project on Student Debt, says that people should realize the new public service forgiveness program will help only those who take low-paying public service jobs. Borrowers who take on high-paying government or nonprofit jobs will have to pay off their loans, he said.

Anyone hoping to take advantage of the loan forgiveness program should make sure to consolidate loans with the federal government's new Income-based Repayment option, Shireman said. That way, low-paid public service workers will have to pay only a reasonable portion of their salary toward their loans, which could be lower than the regular loan payment. After 120 payments, the remainder of the loan will be forgiven. More information can be found at ibrinfo.org.

Congressional staffers say they are working on fixes to the Teach grant law to prevent the kind of unhappy surprises Jones warns of. A major education bill currently being discussed in House-Senate negotiations would broaden the definition of high-need classrooms and give the Education Department the power to give breaks to students who try but fail to get hired by needy schools.

source: usnews