Student loan forgiveness programs prove complex

In 2007, an act passed by members of Congress and signed into law by President George W. Bush may have sounded like a miracle to certain American students. The College Cost Reduction and Access Act of 2007 included funds for a new program called Public Service Loan Forgiveness. Under PSLF, college students who paid for school using federal student loans and entered a career in the public sector could have their entire debt balance forgiven after 10 years of regular, on-time payments. While the program included many additional restrictions and eligibility requirements, it was still an ambitious idea that may have seemed almost too good to be true. Unfortunately, that skepticism may now become a reality for some who had been planning to utilize the program.

"More borrowers are finding it difficult to have their student loans forgiven under the PSLF program."

More than 10 years after the start of the program, and with of its first graduates moving to have their student debt forgiven, problems are beginning to surface. CNN reported that as of February 2018, more than 7,500 people had applied to have their loan debt cleared under the PSLF, but the U.S. Department of Education countered that fewer than 1,000 of them would actually qualify.

CNN and other news outlets spoke to graduates who say loan servicers and perhaps the Department of Education itself had misled borrowers about who actually qualifies for PSLF, as well as the documentation that borrowers must provide to prove their eligibility. The issue has grown bad enough that as part of the most recent $1.3 trillion federal spending plan passed by Congress in late March 2018 appropriated a $350 million fund to address these issues. But even that may not be enough.

The ordeal has raised new questions about what U.S. students and public sector employees must actually do if they want to see their debts forgiven under the PSLF.

PSLF basics

Compared to the reality faced by many borrowers, the concept of the PSLF is relatively straightforward. Qualification for the program is based on a borrower's history of timely repayment, the student loan program they used to pay for college and the employers for which they have held full-time positions since graduating.

In general, according to the Department of Education, "The Public Service Loan Forgiveness (PSLF) Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer."

There are, of course, several caveats and definitions that need to be expanded upon to gain a full understanding of the PSLF. Some of the most important include:

  • Which employers qualify: According to the program's rules, "qualifying employment" for the PSLF includes any "government organization" or a 501(c)(3) nonprofit organization. However, in a lawsuit filed against the Department of Education by the American Bar Association, it was revealed that some loan servicers may have misled borrowers into thinking their jobs met these qualifications. That lawsuit is still pending, but the recent budget measure passed in Congress is expected to address at least some of this issue.
  • Which borrowers qualify: To have debt forgiven under PSLF, it has to have come from the William D. Ford Federal Direct Loan Program. The Department of Education has clarified that if a borrower's loan does not call itself a "direct" loan, it does not qualify for the PSLF.
  • How to make payments: Although the PSLF's rules state generally that the program requires 120 payments, it does not explain until further down the page that these must be made as part of an income-driven repayment plan. That means that debt payments that count toward the 120 threshold for the PSLF cannot be made faster or larger than your plan allows. In some situations, that might actually mean paying more interest over time than if larger or more frequent payments were possible.

To add to the confusion, borrowers have told the New York Times and other media outlets that their loan servicers, employers and the Department of Education itself have been slow to answer questions about the PSLF program, or simply refused to accommodate various requests for assistance. One former federal employer with an extensive background in student loan financing told the New York Times he believed the program to be "one of the most complex programs ever concocted by Congress."

DoctorDoctors at nonprofit health care organizations may be eligible for PSLF, but they should double check with the Department of Education.

How to handle PSLF problems

Borrowers who still want to take advantage of the PSLF program shouldn't feel scared off by these developments. However, they should use these reports as a guide on how to navigate the system, and proceed with additional caution as they continue to make debt payments and manage their finances.

One thing that experts urge borrowers to do if they hope to use the PSLF program: obtain the proper certification from their government or nonprofit employer once per year, or every time they change jobs. In addition, remember not to take employers at their word if they say they are eligible under the PSLF program before verifying with the Department of Education. Employers shouldn't be blamed too much for this mistake - after all, many are as confused about the program as their employees may be. 

Finally, as with any important financial or legal matter, get everything in writing and keep those documents secure until you can resolve any issues. It might seem burdensome or tedious to keep paper copies of every relevant correspondence that could be required in a dispute over PSLF eligibility for 10 years or more, but it's a chore that may well pay off in the end. Try to scan important documents into a computer for digital storage, as long as you have a way to securely and reliably do so.

Stay tuned for more developments related to your federal student loans or the PSLF program as lawsuits weave their way through the courts and legislative changes continue to be made.

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