Home > 2014 > Students

The Surprising Side Effect of Student Loan Forgiveness Programs

Advertiser Disclosure Comments 6 Comments

As more people learn about and use public service loan forgiveness and income-based repayment plans to make student loan payments more affordable, the U.S. could run into an economic issue. Such loan forgiveness programs incentivize borrowing, according to a recent report from New America Education.

The report authors, Jason Delisle and Alexander Holt, analyzed debt and income data of consumers who qualify for public service loan forgiveness and income-based repayment plans enacted in 2010 and 2012. They conclude that under these programs, many graduate and professional school students are unlikely to fully repay their loans, even if they earn salaries placing them among upper-income Americans. Knowing they don’t have to entirely pay, students may borrow more, without reservation. Universities may then hike the prices, knowing students will borrow to pay the tuition, particularly for certain degrees.

Well, that doesn’t sound good, does it?

Think about it: Universities will put hefty price tags on certain degrees, and students borrow that large amount of money, knowing that after a certain number of years in a particular career and a track record of on-time loan payments, they won’t have to repay everything they borrowed. The government takes care of it, but where does that money come from? Taxpayers, probably.

It’s good the government recognizes that higher education is sometimes an unbearable cost, given the price tag on some degrees and the earning potential in related careers. What this study highlights is that loan forgiveness programs can potentially reward over-borrowing and penalize graduates who don’t go into public service jobs. It seems the loan forgiveness programs recognize how some degrees have become unaffordable, but they don’t address the root of the problem: rising costs of higher education.

For students whose earnings are exceptionally insufficient for supporting student loan payments, loan forgiveness can be a lifesaver. As the analysis points out, a lot of people earning plenty of money may still benefit from loan forgiveness, which shows these programs may not be sustainable without revision. There’s certainly a place for loan forgiveness, as long as it doesn’t worsen the issue of high tuition costs.

Student loan debt can be a major drag on your day-to-day finances as well. Your credit score can suffer if you can’t make your monthly payments. You can see how your student loans are impacting your credit scores for free on Credit.com.

More on Student Loans:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • http://www.Credit.com/ Gerri Detweiler

    Not necessarily. A collection agency does not have to successfully contact you before they can report the collection account to the credit reporting agencies. But that doesn’t mean they’ve done other things wrong. This article may be of interest: The Ultimate Guide to Debt Collectors

  • Tray

    Can this student loan debt forgiveness have a negative impact on your credit score?

    • http://www.credit.com/ Credit.com Credit Experts

      It shouldn’t, unless it creates more debt that you hadn’t expected. You can read more about that here: student loan disability. If the debt is forgiven because you work in a job that qualifies you to have some or all of her debt wiped out (certain medical, teaching or law enforcement positions, for example) you don’t get a tax bill. But loan forgiveness is a debt you no longer owe, and it does not hurt your credit to accept it.

      • Tray

        Tax bill? I am looking into the student loan forgiveness as I work for a government agency and didn’t not want it to effect my credit

  • Tray

    What do you mean you don’t get a tax bill?

    • http://www.credit.com/ Credit.com Credit Experts

      If the loan is forgiven due to disability, you do owe tax. If it is forgiven for other reasons (certain jobs), then you do not.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team