by Alex Tabarrok
Wiping out 10k in student debt is not the most expensive part of the Biden student loan program. Most Federal student loans are now eligible for an income based repayment plan, under these plans students pay a small percentage of their “discretionary” income, say 10%, and then after a fixed number of years the debt is wiped off the student’s books. At first glance these plans don’t seem crazy, but as Matt Bruenig points out they create perverse incentives.
Under the Public Service Loan Forgiveness (PSLF) program, law graduates that go on to work in the public sector, which is a lot of them as the public sector employs many lawyers, only have to pay 10 percent of their discretionary income for 10 years in order to have their debt forgiven.
Law schools figured out many years ago that, for a student who is planning to enroll in PSLF upon graduation, prices and debt loads don’t matter. Ten percent of your discretionary income is ten percent of your discretionary income regardless of what the law school charges you and how much debt you nominally have to take on.
Law schools also realized that they could make the deal even sweeter by setting up LRAPs [repayment programs, AT] that give graduates money to cover the the modest repayments required by the PSLF.
The LRAP schemes work as follows: ...