In a blog post published on Higher Ed Watch today we describe how a loophole in two federal programs – Grad PLUS loans and Income Based Repayment for federal student loans – allows graduate and professional schools, and the students who attend them, to shift the entire cost of an advanced degree onto U.S. taxpayers. Our analysis focuses particularly on a program that Georgetown Law has set up to exploit this loophole. The school’s program, called Loan Assistance Repayment Program (LRAP), promises Georgetown Law graduates a free legal education so long as they borrow federal Grad PLUS loans to finance it and then use Income Based Repayment (or the Pay As You Earn, PAYE) to repay.
Our blog post on Higher Ed Watch has more of details on how that works. But the short explanation is that the school promises to make graduates’ loan payments if they use Income Based Repayment or PAYE because those programs limit loan payments and offer unlimited loan forgiveness after 10 or 20 years of payments. Conveniently enough, the federal government will lend graduate and professional students whatever a school charges, plus living expenses. Schools therefore can charge students for the cost of running their own loan repayment program and students take out federal loans to pay for it, but the federal government will ultimately forgive all of the loans. We estimate that the average amount a Georgetown Law grad stands to have forgiven is $158,888.
In our research on the Georgetown Law LRAP program we stumbled upon an informational seminar that the school posted on its website. Two Georgetown Law employees, Danae Newman, the director of financial aid and Charles Pruett, the assistant dean for financial aid, explain LRAP to students in a question and answer session. The presentation offers a shocking view into how one of the country’s most elite and expensive law schools exploits a loophole in federal law to maximize the amount of loan forgiveness that its students receive. We have excerpted key segments below and included a brief analysis for each segment.
Who Pays for LRAP?
Question from the audience: Assuming that people are covered under Georgetown's LRAP, isn't the incentive still to use IBR, because were people to use qualifying employment (inaudible) enter the private sector presumably would not be as high under IBR as more payments would have been made. So what is our incentive, assuming that we'll be covered by LRAP (inaudible)?
Danae Newman: (Answers by talking about commitment to public service and how it lowers a monthly payment and says)… It's also cheaper for us as well.
Student who asked question: … So it's easier for Georgetown to cover more people.
Danae Newman: Correct. Absolutely, yeah.
Charles Pruett: The big thing is that it's not really Georgetown, it's you guys because LRAP is primarily funded through tuition.
The student asks a technical question about the differences between the federal government’s loan repayment programs and how they interact with LRAP. But the important part of this segment is in the response that Charles Pruett offers. He acknowledges nearly all of LRAP is paid through tuition—or, in other words, the program is financed by students themselves. That means students can borrow federal student loans to pay for tuition, which includes the cost of repaying their own student loans, and then all of those loans are forgiven by the federal government.
How Much Should I Borrow...
(This clip is a compilation from two different parts of the session. We combined them because we believe they are relevant to each other.)
Question from the Audience: Do you recommend borrowing 100 percent of the loans you’re eligible for each year?
Danae Newman: While you’re going to school? There’s a mixed review on that. I always say borrow what you need. Obviously if you borrow 100 percent and you don’t really need it, you know that if you’re all about going into public interest and that’s your life and that’s what you want to do for the next ten years, you know that that’s your commitment and you’re on that track then obviously all that money will be forgiven after you the 120… but I’m very conservative when it comes to that kind of stuff because you just never know what’s going to happen, so if you borrow all this money, you’re in public interest for five years, all that interest is accruing, and if you don’t stay in public service then you have a lot longer of a payment to make, you’ll still be in Income Based Repayment, that’s for anybody.
(Segment from a different part of the video)
Charles Pruett: To put another point on the Pay As You Earn scenario, it's actually so powerful that it is something that our students who are going into large firms could use see a decrease in their monthly. And so if you left to go private, and you stayed in ICR because that’s your eligibility you would have a 20-year forgiveness… (He goes on to explain that if you left after 9 years and stayed in PAYE you never would pay it off even under twenty years).[PAYE] is almost too strong… it helps people who aren't really the intended beneficiary. And so that’s, you know, would it really hurt you one way or another? Probably not would be the answer"
While Danae Newman warns students that even though they can use LRAP and IBR or PAYE, they shouldn’t necessarily borrow more than they need, Pruett undercuts that advice. He says PAYE is so generous, it "helps people who aren't really the intended beneficiary" so even students who plan to eventually earn $160,000 can make their decisions about how much to borrow knowing some of their debt will be forgiven. In case the student’s didn’t get the message, the next segment features a current LRAP beneficiary to offer further advice.
... If I Can Ignore My Debt
Current LRAP Beneficiary: Can you live on a public interest salary? I don't know. Pretty much, I mean those are different numbers, depends on what sort of job you take but pretty much you get to look at the salary they're offering you and you get to ignore the fact that you have, you know, six digits of loans.
This student is acknowledging that the amount in federal student loans she took out has no bearing on the type of job she will take or how much she intends to earn. If you enter public service, the amount that Georgetown Law charges, and the amount you borrow, is irrelevant. The LRAP participant’s comment about “six digits of loans” also lends credence to our estimate that the typical participant stands to walk away from $159,000 in debt, courtesy of the U.S. taxpayer.
Don’t Prepay, That’s A Waste of Money
Charles Pruett: If I get the lump sum payment (from Georgetown) do I pay all of my loans at once?
Danae: No! No! You have 120 on-time scheduled payments. When you receive that disbursement from us, make sure you're paying every single month because you have to show that you made 120 on-time scheduled payments. So every time you make that payment, it counts as one credit. You get 120 credits, that's when your loan, is then, you can apply for forgiveness, so do not make a lump sum payment on those loans. Don't prepay them, that's a waste of money. Just, each month make sure you make those payments out of that disbursement that we give to you.
When Newman says "don't prepay them, that's a waste of money," she's right. Why prepay a loan that is going to be forgiven?
Shelter Income to Boost Loan Forgiveness
Charles Pruett: The program [Income Based Repayment and PAYE] actually encourages you to make very positive changes [to how you take your annual income]. So if you want to keep your adjusted gross income (AGI) as low as possible, if you get a raise of three thousand dollars, by all means put that entire three thousand dollars towards your retirement and you will not see your AGI increase, you won't see your payments increase and so as you get raises as you get closer to the threshold please, please, please, don’t make it an adjusted gross income choice, keep that out of your adjusted gross income, put more and more and more money into your retirement.
A borrower’s payment under IBR and PAYE is based on her adjusted gross income, which is likely less than her total income (i.e., salary, wages, tips, etc.) because she can contribute to pre-tax fringe benefits (retirement contributions, health insurance premiums, dependent care accounts, transit and parking benefits, etc.) and take above-the-line deductions—even for paying interest on their student loans! The distinction between total income and AGI is important because even a borrower whose AGI is only slightly below her total income will make significantly lower monthly payments under IBR and PAYE, thereby increasing the amount of unpaid principal and interest that will be forgiven by the federal government.
In the video, Charles Pruett is explaining that detail to the students. If they want to lower their monthly payments and increase the amount of debt the government forgives, they can shelter more of their income from their AGI. In a series of bulletins Georgetown also provides students with other helpful tips, such as the benefits of filing a separate tax return from your spouse so that loan payments aren’t calculated off household income, and why borrowers can and should delay notifying the U.S. Department of Education of any increases in their incomes.
To be sure, these practices are legal. But they show how lawmakers have created a federal program that is far more generous than many understand it to be. And yes, students and schools are figuring it out and taking full advantage of it.
Will Congress Wake Up to What They've Done?
Question from the audience: Since no one’s actually had there loans forgiven by the federal government [yet], what happens in 2017 when (inaudible)
Second audience member: Then they’ll stop. (Laughter)
Charles Pruett: Well, by that point, there’ll be tens of thousands of attorneys making sure that there’s some kind of (crosstalk—someone says “grandfathering in”). No one is expecting that it’s [federal loan forgiveness under IBR and PAYE] going to be derailed for current participants. My concern is that the class that’s going to be entering in 2017 and exiting in 2020, 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. But the perception is that a) it’s incorporated by reference into your promissory note and that again, we just think that they would launch a legal firestorm that they wouldn’t want to put up with if, for people that are currently in the program, so.
The student is saying, this program seems too good to be true, what happens when the government realizes how costly this program is, or how inequitable it is that Georgetown Law graduates can walk away from $159,000 or more in federal student loans? Charles Pruett acknowledges that once lawmakers realize “what they’ve done,” yes, they will probably close the loophole that makes the scheme possible. Our post on Higher Ed Watch has some suggestions on how they can do that.