Often I stumble upon someone who is concerned whether PSLF will change or be repealed in the next decade. If you’re relying on it to forgive six figures of debt, I can completely understanding wanting to keep up-to-date on policy matters regarding PSLF. It’s a smart move on your part.
Most of the concern over PSLF comes from a few recent developments:
First, it’s possible the program is more successful than lawmakers originally expected it to be. It’s hard to determine how “successful” it is because there aren’t good numbers showing how many people are enrolled in PSLF and the collective total student loans that may be forgiven. That’s because there is no PSLF program. PSLF is a forgiveness mechanism that sits on top of the various income-driven repayment plans like IBR, PAYE and REPAYE. If you make 120 qualifying payments, PSLF steps in and forgives the entire loan balance, but those payments are still being made pursuant to the underlying student loan repayment program.
But just because numbers are hard to find doesn’t mean the government isn’t trying to understand the magnitude of PSLF. In late 2015 the Obama administration proposed capping the amount of student loans that can be forgiven under PSLF at a little over $57,000. The proposal to cap PSLF originated as part of the push to modify PAYE. When the government finalized the modifications (now known as REPAYE), the component capping PSLF was noticeably absent from the regulations. Whether it will come back remains to be seen.
Yet, in the background the government began crunching the numbers. The Congressional Budget Office (CBO) prepared reports estimating exactly how much the government would save by capping PSLF forgiveness. According to the Brookings Institute, the CBO initially estimated that a cap of $57,000 would save $265 million over 10 years (2015 to 2024). By the next year, the agency revised the number to $6.7 billion. This suggests that the number of borrowers expecting PSLF forgiveness could be quite large!
If PSLF is becoming a governmental burden, you’d think it would find some protection because it supports highly-educated professionals devoted to serving the government and non-profit institutions. In fact, many government agencies may have a difficult time hiring lawyers without the benefits of PSLF. The starting salary for a Queens Assistant District Attorney is $71,000. If you have $200,000 in student loan debt, the PSLF program provides a Queens ADA with another ~$45,000 in salary benefits (my back-of-the-envelope calculation of how much pre-tax income you would need to cover 7% interest and pay off 1/10 of the loan each year). If PSLF disappeared, I doubt the city government could raise the starting salaries to $110,000, thus pushing many civic-minded attorneys to seek jobs in the private sector.
Despite the fact that government agencies need PSLF, there are signs that the Department of Education is trying to draw a tighter circle around those that qualify for PSLF. Back in June 2016, reports started appearing that employees of 501(c)(6) organizations no longer qualified for PSLF. The decision to exclude these employees came after years of FedLoan Servicing saying that the employees did qualify. The American Bar Association – one of the organizations effected by this aboutface – attempted to resolve the problem with the Department of Education. After being unable to reach agreement, the ABA filed a lawsuit in December against the Department of Education seeking injunctive relief. I can’t explain why the Department of Education decided to target the American Bar Association, but it doesn’t bode well for individual lawyers when a government institution targets the ABA. The way this is playing out suggests that the DOE knew it would get sued and wanted to get sued so that it could establish conclusively that these employees do not qualify for PSLF.
If the landscape is tightening, the upcoming student loan forgiveness of wealthy doctors could be the impetus for a major shift in the program. In what’s known as the Doctor’s Loophole, for years medical students have been taking advantage of four years of residency by making PSLF qualifying payments. Because these four years are almost always with hospitals (a 501(c)(3) organization) during a time of low income, doctors can easily rack up 4 years of qualifying payments while making around $50K per year (and making very low monthly payments). If the doctor then proceeds to a fellowship for another three years, they may have as much as seven years of qualifying payments made by the time they start a high-income job. If they can find a job for three more years at a 501(c)(3) organization (i.e. a hospital), they can walk away with hundreds of thousands of dollars forgiven even while earning in excess of $200,000. Because their remaining payments can never be higher than the 10-year Standard Repayment Plan, the payments made during the high-income earning years will barely touch the outstanding debt. You can imagine how the headlines will play if the WSJ is shouting that rich doctors are walking away from $100,000s of debt.
There is some good news for lawyers relying on PSLF. The program is built into the Master Promissory Note (and has been since 2007). As you can see from the excerpt below, the note promises that the government “will forgive the remaining balance due on your eligible Direct Loan Program loans after you have 120 payments …” Given that PSLF is baked into the note itself, a strong argument exists that it’s a contractual relationship between the borrower and the government.
If the government were to cap forgiveness for existing borrowers, it would be directly contradictory to the above language. There’s additional evidence that the government may grandfather existing borrowers into the PSLF program. In 2015, the government wanted to make a major changes to IBR/PAYE. The government proposed eliminating the cap on monthly loan payments. Under IBR/PAYE, you are limited to 15% of your discretionary income. However, if your income rises such that 15% of your discretionary income is above the payments made under the 10-year Standard Repayment Plan, your monthly payments default to the lower of the two amounts. In other words, you’ll never make payments greater than the 10-year Standard Repayment Plan. Rather than modify IBR/PAYE to make this change, the government created an entirely new program (REPAYE) which now removes this IBR payment cap. Under REPAYE, if your income shoots up, you’ll be paying 10% of that amount regardless of whether it’s above or below the amount you would pay under the 10-year Standard Repayment. To me this suggests that the government prefers to create new programs for new borrowers rather than modifying the agreements in place with existing borrowers.
Because PSLF is baked into the promissory note and given the government’s tendency to create programs that only apply to new borrowers, I’d guess that PSLF is likely to be around for current borrowers. But when it comes to the grandfathering and the existence of the program, it’s only a guess. Nobody can be certain what will happen. That’s why if you’re expecting for your loans to be forgiven under PSLF, you need to be filing the certification every year to ensure that your payments count as qualified payments. You can get the form here (and you should make sure to read all six pages since it covers a lot of important eligibility topics). Once you submit the form to the Department of Education your servicer will switch to FedLoan Servicing (that’s the closest you’re going to get to being “in the PSLF program”). Later this year we’ll see the first borrowers eligible for forgiveness under PSLF (the program began in October 2007). I look forward to hearing their forgiveness stories and will be covering them on the site.
Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He is always negotiating better student loan refinancing bonuses for readers of the site or finding honest companies that provide student loan advice for a fair price.
I’ve spent a bit of time cautioning people – primarily on reddit – that PSLF is not the savior to all of their potential future financial woes.
Still, I’m personally a fan of the contractual relationship argument you presented. While as a lawyer I’d never provide this as advice to a client, I see no reason to believe that the program would ever be entirely repealed without some “grandfathering in” of prior borrowers who were already making qualifying payments in the program based on that exact language in the promissory note. Without the grandfathering in, I think the federal government had better be ready for a slew of lawsuits.
But then again, that’s sort of operating under the false assumption that the federal government is one massive entity that issues student loans, writes the tax code, forgives debts, and places limits on debt forgiveness. That’s just not true. So, I’m not sure whether the entity that holds the promissory note seemingly guaranteeing that the remaining balance will be forgiven is an entity that can throw up it’s hands at the end and say “Hey, it’s the IRS’s fault that it’s a taxable event now! Sorry!” or “Hey, it’s Congress’s fault that you’re entire balance can’t be forgiven anymore. Sorry!” Perhaps you could shed some light on that, so I can do a post with the information you give me? 🙂
I’d also note – for readers, as I’m sure you’re already aware – that PSLF is only for “eligible Direct Loan Program loans,” so even many federal loans are not actually eligible for forgiveness. The entirety of my ~$155k in debt upon graduation happened to be within the purview of PSLF, but not everyone took an identical route!
The contractual argument is pretty strong. It’s particularly important that the promissory note says that under PSLF “we will forgive the remaining balance due on your eligible Direct Loan Programs loans … ” To cap the program for borrowers would be to differ from the contractual agreement between the parties when the loan originated. Your damges would be pretty easy to pinpoint. I haven’t spoken to a litigator about it, but this seems straightforward. Note that it doesn’t say “and such amount of forgiveness shall be tax free” so the government could easily change that (as you pointed out). As for the Department of Education throwing its hands up saying it’s Congress’s fault that the program has been eliminated, I’d think the appropriate responsive argument would be for the borrower to throw up his hands and say “Not my problem. We entered into a contractual relationship. You’re not living up to your end. I no longer am obligated to repay this money.”
Taking a step back, the real problem is the uncertainty this creates. Any decent lawyer will tell you that it’s impossible to predict how the courts will act. We can’t guarantee that you’ll be grandfathered in should PSLF change. And we can’t guarantee that the contract protects you 100%. If you’re relying on PSLF, my advice is to just keep getting the certifications and moving forward. I don’t think you should abandon the program.
If I were in law school or thinking about going to law school, I’d be much more skeptical about taking on six figures of debt thinking that something like PSLF would be available for me.
C’mon, Josh, nothing is ever straightforward in law!
I actually agree with you because of the bolded print. Very strong argument to be made on the plain interpretation of the promissory note. But I’m playing devil’s advocate here and assuming that there is a chance that a cap might cause this wording to be viewed along the lines of a contractual agreement for an illegal purpose. I mean, think of it from the government point of view: “We’re in a debt crisis! Now is not the time to let student loan borrowers off the hook! We NEED the money! It’s a matter of national security!” (A little excessive and alarmist, sure, but you get my drift.)
I agree 100% with your advice for borrowers. I draw the line at around the third year of law school: If you are in law school today and borrowing tens of thousands each year assuming this program will be available for you, I’d be fairly confident about those loans that you’ve already signed for. But future loans are questionable. Incoming law students should certainly NOT go to law school thinking, “Eh, it’s expensive, but I’ll just work in the public sector for a while and pay 1/3 of the cost!”
If law school isn’t worth the full cost to you, it’s not worth the cost of pursuing PSLF either.
Wondering where the image of the Master Promissory Note came from? My MPN from 2012 has slightly different wording, with a potentially dramatically different impact:
“A public service loan forgiveness program is also available. Under this program, the remaining balance due on your eligible Direct Loan Program loans may be cancelled after you have made 120 payments on those loans (after October 1, 2007) under certain repayment plans while you are employed in certain public service jobs. The Act may provide for certain loan forgiveness or repayment benefits on your loans in addition to the benefits described above. If other forgiveness or repayment options become available, your servicer will provide information about these benefits.”
This states that the loans “MAY” be forgiven, not that they WILL be. Huge difference!
Just sent you an email. I’d love to see a screenshot of that language you quoted.
Sent! Thanks for looking into this.
Agreed. I’ve looked into this on behalf of family members, and while I think that prior borrowers will be grandfathered in should there be any change to amounts forgiven, I could very much see the IRS arguing that it can change the amount forgiven to taxable income. The best argument to the contrary would be a quasi-contractual argument that the program was branded and explained as promising tax-free loan forgiveness.
Also I’m curious as to whether amounts forgiven could be taxed at the state level, as opposed to the federal level.
I don’t think it’s very clear, unfortunately. At the very least this will differ depending on the state in particular, which is all the more reason to have your debt canceled while you are a resident of a state with no income tax!
It’s worth noting that the Dept of Education is only expecting about $50 million in loan forgiveness for 2017. Not surprisingly, almost nobody figured out how to submit the paperwork for this program until after it existed for a few years. You can check that stat from the recent GAO report on how the loan programs will cost a lot more than expected.
Thanks for pointing out the $50 million figure. Will be interesting to see what happens in 2018 since it’ll be a full year of PSLF forgiveness.
A point I didn’t raise in the article is that the stats are a little inflated as well since they’re charging outrageous 6-8% interest on the loans which are growing in balance each year. It’s a little disheartening that critics of PSLF will claim that millions and millions of dollars are being forgiven, when the reality is that much of the forgiven amount is tied up in interest that shouldn’t be accruing anyway.
Agreed…. it’s the law guys. They just change it to suit their ambitions.
Just to clarify – if all of my loans are direct and are owned by the U.S. Dept of Education, then why must I recertify every year if I work for a government agency and I know that i am making qualifying payments. Does the recertification put you in the “program” or is the program in fact just a mechanism to forgive the loans if the mechanism still exists after 120 qualifying payments.
If you’ve never certified your loans, then you may not be using FedLoan Servicing (the only servicer that handles loans in the PSLF program). For that reason, it’s good to get the first certification over with so that you can transfer your loans from your current servicer to FedLoan Servicing (which the Department of Education will do automatically as soon as you send in the first certification form). I can confirm with personal experience that it’s not a pleasant or smooth process to transfer your loans to FedLoan Servicing, so expect a lot of trouble along the way.
If you’ve certified once before (i.e. your loans have already been moved to FedLoan Servicing and they provided you with a letter confirming the number of qualified payments that you’ve made to date), then it’s still good practice to recertify every year to confirm that you’ve made 12 qualifying payments. It’s one of those situations where you know you’re working for a qualified employer and you know that you’ve made monthly payments, but are you sure that FedLoan Servicing feels the same way? I’d rather discover any problems or glitches in the system sooner rather than later, particularly when it will be easier for you to prove that you did in fact make a payment (imagine trying to do so if in 7 years they tell you that they have no record of receiving a payment from April 2014 …)
PSLF itself isn’t a “program” – just a mechanism to forgive the loans after 120 qualifying payments as you said above, but by certifying your loans for the first time you’ll get them over to FedLoan Servicing (the only servicer than can officially determine whether a payment is “qualified”) and by rectifying annually you’ll make sure that both you and FedLoan Servicing agree on the number of qualified payments made to date.
Hi BLI, came across your blog and really enjoying the content, especially on student loans. After reading this post, I went back and found my old Direct Loans Consolidation MPN from June 2011 and found that the wording is different from the one that you quoted above. Mine reads as follows:
“A public service loan forgiveness program is available that provides for the cancellation of the remaining balance due on your eligible Direct Loan Program loans after you have made 120 payments (after October 1, 2007) on those loans under certain repayment plans while you are employed in certain public service jobs.”
I’m not a lawyer, so was wondering what your opinion was on the somewhat vague wording of this version (e.g. lack of “we will forgive” phrase) and if it would give the government a better chance at not honoring the PSLF program? Appreciate your thoughts. Thank you.