Loan Forgiveness Uncertainty

Student loan borrowers who entered into lower-paying public service careers with the expectation that their debt would eventually be wiped out by the federal government shouldn't bank on assurances from government contractors that they qualify for loan forgiveness. That was how several observers read a new court filing by the U.S. Education Department in a lawsuit over the Public Service Loan Forgiveness program.

The American Bar Association sued the Department of Education in December, along with four lawyers who said they were led to believe until recently that they qualified for the Public Service Loan Forgiveness program.

In a court filing this month, however, the government argues that borrowers shouldn't expect that answers from their loan servicers will reflect the department's final ruling on their eligibility for the program. That means the department is encouraging borrowers to take lower-paying public service jobs based on a promise -- of loan forgiveness -- by a contractor that the government is free not to honor, the association said.

The loan forgiveness program, which was established in 2007, promises that student loan borrowers who worked for qualifying employers in the government and nonprofit sector and made 120 payments under an income-based repayment program would have their remaining loans wiped out. The first applications for the program are set to come due later this year as congressional lawmakers are raising concerns about the program's long-term costs.

The ABA argued in its lawsuit that the department effectively changed the rules midgame with respect to the association's status as a qualifying employer. The government in its latest filing denies that argument and says a loan servicer's response to employment certification forms "does not reflect a final agency action on the borrower’s qualifications for PSLF." A department spokesman said that as the matter was in litigation, it would not be commenting.

Linda Klein, president of the American Bar Association, said the department's argument was "both illogical and untenable."

"Obviously, the Department of Education would have to have responsibility for the contractors they hire," she said. "Why would an arm of the government hire a contractor and not supervise them?"

The suit involves four plaintiffs who worked as lawyers, including one current and another former employee of the ABA. The two other plaintiffs worked for Vietnam Veterans of America and the American Immigration Lawyers Association. Klein said individuals like the plaintiffs who brought the lawsuit have chosen careers and made other life decisions based on the promise of loan forgiveness. The ABA acknowledges in its original complaint that the department has never delegated final decision-making authority but said that there is no appeals process either through the servicer or the department itself. The borrowers, meanwhile, have made career plans based on the feedback from servicers, Klein said.

"They've done everything that was asked of them. Now the rug is being pulled out from under them," she said.

Student loan borrowers don't enroll in Public Service Loan Forgiveness the way they would with income-driven repayment programs. But they must keep track of their progress in meeting the program's requirements over the course of 10 years before applying to have their debt forgiven. The department created the employment certification in 2012 to help borrowers get confirmation through their servicer whether or not they were on track to qualify.

As of last August, more than 430,000 student loan borrowers had submitted at least one employer certification form required to qualify for the program. While that number doesn't indicate how many will actually qualify or how many will initially apply, it does indicate sizable interest in the program. John B. King Jr., the second Obama administration secretary of education, said at the time that the number was a sign of the department's successful outreach to borrowers about the program.

Most applicants will likely be employees of traditional 501(c)(3) nonprofit organizations, government agencies and programs like AmeriCorps or the Peace Corps. The ABA is a 501(c)(6) organization, a class of nonprofit that includes membership organizations like trade associations. Nonprofits with (c)(3) status are operated exclusively for charitable, religious or educational purposes and are restricted in the kinds of lobbying activities they can engage in.

Bob Shireman, a senior fellow at the Century Foundation and a former Obama Department of Education official, said the government made a specific arrangement for the Pennsylvania Higher Education Assistance Agency to act as the servicer for borrowers planning to apply for Public Service Loan Forgiveness, because PHEAA had the appropriate expertise to answer questions about qualifying for the program.

“It defeats the purpose of the certification process to tell people that, actually, that doesn’t mean anything after all,” Shireman said. “The annual certification should have, from a borrower’s perspective, settled the question of ‘Was I working at a qualifying job?’”

Shireman said most borrowers counting on PSLF who worked for government employers or 501(c)(3) organizations likely shouldn't be concerned. But he said the certification process was designed so that students wouldn't have to wait 10 years to have some certainty over their status.

"To reinsert that question mark is not just bad for these particular individuals -- it casts a pall over the whole program," he said.

Karen McCarthy, director of policy analysis at the National Association of Student Financial Aid Administrators, said the uncertainty apparently created by the department's arguments was unacceptable for borrowers.

The department, McCarthy said, "hired PHEAA to do that task for them. To the borrower, it's all the same."

NASFAA warned in a letter to the department last year that the government should be doing more to make sure borrowers who planned to apply for PSLF were with the right student loan servicer and that their current and former employers meet the requirements of the program. The legal fight over the program also followed a Government Accountability Office report in November that found the department was dramatically underestimating the cost of income-driven repayment plans and found that nearly a third of loan debt expected to be repaid through those plans would be forgiven via PSLF.

Robert Kelchen, a Seton Hall University education professor who studies issues involving financial aid, said denying pre-emptive qualification for borrowers under PSLF helps the department avoid creating financial liabilities from the program.

"This seems like a fiscally prudent idea for ED, given the budget pressures they will face from President Trump, although it certainly increases the amount of uncertainty that students face," he said.