In 2006 and 2007 the federal government created two separate programs that, when combined, created the loophole: Grad PLUS loans and income-based repayment for student loans. Under the Grad PLUS program, graduate and professional students can borrow to pay for the entire cost of their education, including living expenses, at just about any college and at whatever price the institution sets. Income-based repayment, in its most recent iteration, caps recent and future students' payments on those loans between zero and 10 percent of annual income and forgives any remaining debt after 10 years for those working in virtually any government or nonprofit job, or after 20 years for all others.
While both programs have their flaws, on their own they work largely as lawmakers intended. But when schools and students strategically combine them, like ammonium nitrate fertilizer and gasoline, the result can be explosive. So powerful, in fact, Georgetown Law claims on its Web site that certain students enrolled in its Loan Repayment Assistance Program "might not pay a single penny on their loans—ever!" Among the qualifications for the deal are that the graduates work in a legal capacity for government agencies or nonprofit organizations for at least 10 years and earn no more than $75,000 annually.
Here's how it works: Under Georgetown's repayment-assistance program, called LRAP, students take out Grad PLUS loans to cover the full cost of attending law school (around $75,000 per year, which includes living expenses). After they graduate, they enroll in income-based repayment. If they work in qualifying jobs, Georgetown pays 100 percent of their loan payments for 10 years, after which the income-based repayment program forgives the remaining balance. The students pay nothing for their education.
On the surface, it seems like Georgetown Law is taking a loss on students who go into public service. But the truth is far more sinister. Georgetown loses little if any money from this scheme because the school simply includes the cost of the loan-repayment program in its tuition. And since the federal government issues loans for whatever amount Georgetown charges, students just take out more loans to cover that cost.
See the problem? Neither Georgetown nor its students are financing the program. The taxpayer is, by providing them with access to unlimited loans and unlimited loan forgiveness.
But don't take our word for it. Charles W. Pruett, assistant dean for financial aid, recently told students in a taped seminar that it's not really Georgetown that finances the program, "it's you guys, because LRAP is primarily funded through tuition." Right, and remember, those students take out federal loans to pay that tuition, loans that will ultimately be forgiven.
Pruett explains in a journal article that combining Grad PLUS and IBR "makes it possible for law schools to create or restructure LRAP in a way that provides significant debt relief to graduates in public service at the lowest possible cost to the law school. ... The central idea behind coordinating LRAP and federal benefits is to restructure LRAP programs so that federal programs do most of the heavy lifting" (emphasis added).
That's nice lawyerese. After Georgetown bears the "lowest possible cost," the "heavy lifting" left for taxpayers is $158,888 per student. That is, by our estimate, the average amount of debt a Georgetown Loan Repayment Assistance Program participant stands to walk away from under income-based repayment. Compare that to what the federal government provides as a maximum Pell Grant benefit of about $34,000 over six years for low-income undergraduate students.(As of February 2013, there were 245 participants in the Georgetown program.)
Pruett and his colleague Philip Schrag have encouraged other law schools to launch programs like Georgetown's, and several have, including Berkeley and Duke. In fact, there is nothing to stop all graduate schools from adopting these schemes and expanding them to graduates beyond those in public-service jobs once they understand that the apparent cost of covering a student's loan payments is really no cost at all; nothing prevents a school from simply hiking tuition by the same amount. But those tuition hikes never translate into higher loan payments for student or school—only bigger loan forgiveness after 10 or 20 years under income-based repayment.
This cannot be what most lawmakers had in mind when they created that plan, loan forgiveness for public service, or Grad PLUS loans. Fortunately, they need only make a few tweaks to head off the abuse.
First, impose a $30,000 cap on the amount of debt that nonprofit or government workers can have forgiven under income-based repayment. That is slightly below the maximum the government would provide an undergraduate from a low-income family under the Pell Grant program. Graduate students shouldn't qualify for more de facto grant aid than low-income undergraduate students. The cap allows for significant loan forgiveness but does not give schools a blank check to raise tuition. It also ensures that students have skin in the game when they decide how much to pay and borrow for school. Borrowers who still struggle to repay after having $30,000 forgiven can continue to repay under IBR and have debt forgiven after 20 years.
Lawmakers should not limit the amount forgiven at the 20-year mark. That provision is a safety net for borrowers who legitimately struggle to repay their loans for an extended period. Therefore, the only way to fully check the financing schemes is to limit the amount graduate and professional students can borrow. An annual $25,000 limit and an aggregate $75,000 limit for all federal loans would solve the problem. Those limits could be higher, but lawmakers should then require graduate students to repay for 25 years before they could receive loan forgiveness.
Pruett, the assistant dean at Georgetown Law, all but admits that lawmakers would be justified in reining in the programs. In response to a student who wonders when Congress might shut the schemes down, he says the year 2017. Why? "That's when the first large wave of forgiveness may happen, and that's when, if someone wakes up to what they've done, that's probably when it's going to be." In the meantime, many Georgetown Law graduates can look forward to U.S. taxpayers footing the bill for most of their education.