In 2007, the federal government rolled out Public Service Loan Forgiveness, a program that forgives outstanding student debt for public sector employees. With the national student loan debt set to surpass $1.4 trillion, the prospect of wiping out some of their balances enabled many graduates to forgo higher salaries in the private sector in favor of nonprofit or public service-oriented fields. But a recent lawsuit has left experts wondering if the program will deliver on all its promises—or if it will even survive at all.
When a graduate enters a public service field, they can submit an employment certification for PSLF eligibility. If approved, they’re given a specific repayment plan—often a set percentage of their monthly income—under the assumption that after 120 payments, or 10 years, the government will forgive the debt. While the premise seems pretty clear, PSLF is young, at least in government years, and its first “class” of participants has just barely reached the 10-year payout mark. Now things are getting weird.
Last December, four lawyers and the American Bar Association filed a lawsuit against the U.S. Department of Education, which manages the PSLF program. According to the suit, the plaintiffs claimed they worked for an eligible organization and had taken all the necessary steps for loan forgiveness. While the plaintiffs’ workplaces were not registered as 501(c)3 nonprofits, they thought, and were told by their loan servicer at the time of application, that they were eligible for PSLF. But in 2016, the Department of Education retroactively revoked the PSLF eligibility of the lawyers’ places of employment—the American Bar Association, the American Immigration Lawyers Association, and Vietnam Veterans of America.
For workers who have applied for the program, losing eligibility status is a big deal. Since payments are income-based, the borrower typically makes smaller payments, but interest on the overall loan and the principle balance are still racking up, leaving many people with a sizable chunk left after 10 years.
But the real kicker came last week when lawyers for the Education Department claimed that filing paperwork to register for PSLF only resulted in “interim, non-binding, individualized determinations,” and that the actual decision on debt forgiveness comes after 10 years, or 120 on-time payments. That argument seems terrifying not only for the plaintiffs who brought the lawsuit but for the half-million other people enrolled in PSLF.
But before you resign from your job in the city’s engineering department, or organize a massive protest outside the Education Department, remember: the plaintiffs in this case worked for entities that were not part of the government or registered 501(c)3 nonprofits. For example, the American Bar Association is a professional association, their specific situation is a gray area for the PSLF program. “After having their PSLF employment certified for years, the government decided that their employers were not actually public service organizations. As a result, they retroactively canceled the certification,” explains Michael Lux, an Indiana attorney who runs the website Student Loan Sherpa.
Lux says the Department’s defense hinges on whether or not those lawyers’ employment certification letters—which certify the borrower is working for a qualified employer—are legally binding in this instance. If it is found that they are not, the government doesn’t have to forgive the debt.
However, Lux adds this lawsuit should not affect most people working toward loan forgiveness.
“Most PSLF people work for employers that are clearly eligible,” Lux says. “The government is not saying it isn’t honoring PSLF. What it is saying is that these lawyers don’t work for eligible employers.” Furthermore, Lux notes that ripping away PSLF from everyone currently enrolled “would be incredibly difficult” because “the government is contractually obligated” at this point for clear-cut qualified employers.
The problem is that gray area is much larger than a few lawyers.
Here’s how the government currently defines qualified employers:
Government organizations at any level (federal, state, local, or tribal)
Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code
Other types of not-for-profit organizations that are not tax-exempt under Section 501(c)(3) of the Internal Revenue Code, if their primary purpose is to provide certain types of qualifying public services.
While government organizations and tax-exempt nonprofits are in the clear, there’s no comprehensive list of what falls under “other types of not-for-profit organizations” and “qualifying public services.” For example, Vietnam Veterans of America, one of groups employing a plaintiff of the lawsuit, provides outreach programs for members suffering from homelessness and PTSD and helps veterans find jobs, but the Department of Education is now saying it’s not a qualifying employer.
And while many PSLF enrollees will likely come through unscathed, we won’t know if any other nonprofits will be deemed ineligible until this fall, which will be 10 years after the program started and the first major round of public service workers file for debt forgiveness.
“This could be happening more often than we know about, but it won’t be until October until we find out,” says Megan Coval, vice president of policy and federal relations at the National Association of Student Financial Aid Administrators.
Coval says the more important issue at hand is the future of PSLF in general. “This is a program that is definitely on the chopping block. We’ve seen interest in its elimination or scaling it back. Trump’s budget proposed total elimination of the program, and Obama proposed a forgiveness cap at $57,500,” says Coval. She says if PSLF isn’t outright eliminated in the 2018 budget, it will continue to come under Congress’s scrutiny.
And if debt forgiveness for public sector employees does get eliminated, it will likely negatively affect nonprofits and smaller government employers who rely on PSLF as an incentive to attract highly qualified candidates.
“Without PSLF, we will have a more difficult time finding qualified teachers, social workers, and other government employees,” says Lux. He’s also concerned about the potential degradation of the public legal system should PSLF get cut. “Attorneys working as prosecutors and public defenders usually make much less than their counterparts working for private law firms. These public interest attorneys definitely feel a duty to serve, but it’s PSLF that allows many to pursue this line of work. Eliminating PSLF would result in less qualified attorneys working in our justice system.”
The silver lining is that the hundreds of thousands of people already enrolled in the program and are working for 501c(3)s or the government will see their debt forgiveness deals honored. But the White House’s budget proposal would axe PSLF for people taking out student loans after July 1, 2018 as part of the $9.2 billion (or 13.5 percent) slashed from the Education Department. So maybe don’t put your protest plans on ice, yet.