Public service is a worthy goal. At best, you get to make the world a better place by working a nonprofit or government public service job. At worst, you get to ride into every conversation you have on a high horse, touting the fact that you work at a nonprofit. It’s a win-win (not for the people you’re in a conversation with).The one downside of a public service job? They tend to not pay very much. That might not be a problem overall, but for people who have high student loan debt – say, lawyers in particular – that could be an issue.Luckily, the Public Service Loan Forgiveness program offers some relief. Unluckily, thanks to mixed messages from the Department of Education that borrowers’ debt may not be forgiven after all, that protection could be going away.
The federal government currently has a few loan forgiveness programs in place. The most common is the Pay As You Earn (PAYE) plan, under which borrowers put 10 percent of their annual discretionary income towards their student loans and the remaining balance is forgiven after 20 years.The Public Service Loan Forgiveness plan is similar, with a few caveats. If you work in eligible public service (federal, state, or local) jobs, or for a qualified nonprofit, you can have your student loan debt forgiven after 120 consecutive payments – 10 years. Private student loans aren’t eligible, and federal loans must be Direct Loans (like Stafford Loans) or Federal Direct Consolidation Loans.The Public Service Loan Forgiveness program was started in 2007, which means it hasn’t really taken effect yet; the ten year mark, when loan forgiveness begins, doesn’t kick in until the end of 2017. There are an estimated 25% of the U.S. workforce in public service and over 500,000 applicants to the program. Public service loan forgiveness doesn’t count as taxable income, which is a huge difference compared to other loan forgiveness. Clearly there’s a lot on the line.That’s why it’s concerning to many borrowers that, according to the U.S. Department of Education, their loans might not actually be forgiven.
The key issue at stake here is the "eligible workplace" stipulation of the Public Service Loan Forgiveness program. Beyond the broad outline stated above, which workplaces are "eligible"? That’s up to the Department of Education. There’s a certification form that you can fill out to find out if your particular circumstances qualify you.But four borrowers, all lawyers, recently found out that their once-eligible workplaces no longer qualified. Worse, their previous loan payments didn’t count; even if they were to take a job at an eligible employer, they’d have to start their 120 payments over.The four borrowers, along with the American Bar Association, are suing the Department of Education, seeking reinstatement into the program.
Besides the obvious "Who’s going to win the case?" there are other questions that arise from this. One is both immediately pressing and has longer term implications: If the rules of the game keep changing, what’s the point in using the program?As Forbes points out, the Department of Education says that "student loan borrowers could not rely on the approval letters sent by the program's administrator, FedLoan Servicing, because any approvals are considered tentative." The Department also recommends that borrowers submit certification forms every year to make sure they still qualify.Even worse than an employer suddenly not qualifying is the fact that payments already made with a qualified employer become retroactively unqualified. It’s one thing to lose the progress made if a current employer’s status changes; it’s something else entirely when switching to a new qualified employer still forces borrowers to start at square one.This moving of goalposts makes it easy to wonder why a borrower would invest time with the program when the rug can be pulled out from underneath them at any moment. "Ten years down the line you might find out if we’re holding up our end of the bargain" seems like a poor answer. Without the incentive of loan forgiveness, most professionals in their right minds would prefer higher-paying jobs in the private sector that will allow them to pay off their debts than roll the dice on a public sector career that may put their finances underwater forever.
The first thing borrowers should do is not freak out. So far, there are only four borrowers part of the suit. They have specific, unique cases. The entire Public Service Loan Forgiveness program hasn’t been dissolved, leaving hundreds of thousands of borrowers twisting in the wind. Borrowers who are part of the program should continue on like normal.But those borrowers should also make sure they still qualify. The Department of Education’s recommendation of submitting a certification from every year isn’t ideal, but it’s a good one considering the circumstances. Ten years is a long time to commit to something, and in the unfortunate circumstance that an employer becomes unqualified for whatever reason, it’s better to know earlier rather than later.Borrowers should also stay up to date on news surrounding student loan forgiveness. The Trump administration has floated ideas about loan forgiveness, but no concrete actions have been taken yet. One proposed plan involves reworking the PAYE plan, increasing the payments from 10% to 12.5% but lowering the time until forgiveness kicks in. That might impact borrowers paying under the Public Service Loan Forgiveness program...or it might not. They might be grandfathered into the new plan...or they might not. Again, the program isn’t changing at the moment, but that doesn’t mean it won’t in the future under a volatile administration.Finally, borrowers should keep paying their student loans. The worst case scenario is that their loans aren’t forgiven as expected, but they’re that much closer to paying them off. Sure, it’s a consolation prize, but it’s better than having the specter of student loans hanging over their heads for even longer. Plus, other forgiveness methods like PAYE, or loan refinancing or consolidation are still viable options.We’ll have to wait to see the outcome of the case against the Department of Education to see how far-reaching this eligibility issue is. We might have to wait even longer to see if the Trump administration makes further changes to student loan repayments. In the meantime, borrowers will have to do what they’ve been doing all along: paying off their student loan debts one payment at a time, or fleeing the country.
Get essential money news & money moves with the Easy Money newsletter.
Free in your inbox each Friday.