Monday, February 5, 2018

Public Service Loan Programs

Public Service Loan Programs

Introduction:   The Trump Administration and Republicans in Congress are proposing the elimination of the Public Service Loan Forgiveness program (PSLF).   The purpose of this memo is to describe and evaluate the program and discuss possible changes to PSLF.

Description of Existing Program:   The PSLF program was formed in 2007 under President George W. Bush.  The program provides loan forgiveness to enrollees who meet the conditions of the program.

The main features of the PSLF are as follows:

·      Eligible PSLF enrollees must work at a government agency or a non-profit organization.  People who work for for-profit firms that are government contractors are NOT eligible for PSLF.  Eligibility is determined by the status of the person’s employer not the type of job a person does or the salary received.

·      Some non-profit organizations including labor unions, political groups, or a non-profit that is not tax exempt and/or does not provide a public service are not eligible for PSLF.

·      Loans can be forgiven after the student borrower makes 120 payments to a qualified loan program. All income driven loan programs are qualifying repayment plans.  The standard 10-year repayment plan is also a qualified plan. However, PSLF applicants using the 10-year payment option would get little loan forgiveness because their loan would be repaid at year 10.

·      A qualifying loan payment must be made within 15 days of the date of the bill and must be made when employed by a qualified employer.

·      Payments made when borrower is in school or in a deferment, grace period, or forbearance are NOT qualified payments.

·      Only direct student loans are eligible for the PSLF program.   The William D. Ford Direct student loan program currently makes up around 80 percent of federal student loans.   Many former students have federal guaranteed student loans, which differ from direct student loans.   The guaranteed student loans, which used to dominate the market are not eligible for the PSLF program.


Issue One: Many people who are now applying to have their loans forgiven after making 120 payments are having their applications for loan forgiveness rejected. As of early 2018, around 7500 people have applied to have their loans discharged.   The Department of Education expects only around 1000 to qualify. 

Many of the disputes over whether a person qualifies for loan discharge center over whether the person’s position qualifies as a public service position.

Some borrowers have accused loan servicers of providing false information on whether loans were eligible for PSLF.   There is ongoing litigation involving allegations of incorrect information on eligibility for PSLF.

the process of applying for PSLF is complex as shown below.

How do I apply for PSLF?

Because you have to make 120 qualifying monthly payments, it will be at least 10 years after you make your first qualifying payment before you can apply for PSLF. Since only payments made after Oct. 1, 2007, can be counted toward PSLF, the earliest that any borrower will be eligible to apply for PSLF is fall 2017. If you are working toward PSLF, you should complete and submit the Employment Certification for Public Service Loan Forgiveness form (Employment Certification form) annually or when you change employers. We will use the information you provide on the form to let you know if you are making qualifying PSLF payments. This will help you determine if you are on the right track as early as possible.
If you do not periodically submit the Employment Certification form, then at the time you apply for forgiveness you will be required to submit an Employment Certification form for each employer where you worked while making the required 120 qualifying monthly payments.
We will take the following actions after we receive your Employment Certification form:
·       We will review your Employment Certification form to ensure that it is complete and to determine whether your loans and employment qualify for the PSLF Program.
·       We will notify you if the form you submitted is incomplete or if we cannot determine, based on the information provided on the form, whether your employment qualifies. We may ask you to provide additional information or documentation to help us determine whether you were employed by a qualifying employer.
·       If we determine that your employer is not a qualifying employer, we will notify you that your employment does not qualify. If you believe there is additional information that would establish the eligibility of your employer, you will have the opportunity to provide that information.
·       If we determine that you do not have eligible loan types, we will notify you that your loans do not qualify.
·       If we determine that your loans and employment qualify, we will notify you.
·       If we determine that your employment qualifies, and if some or all of your federal student loans that are owned by the U.S. Department of Education are not already serviced by FedLoan Servicing, those loans will be transferred to FedLoan Servicing. You will receive a notice if your loans are transferred.
·       If we determine that your employment qualifies, we will then review your payment history (including any payments you made to another federal loan servicer before your loans were transferred) to determine how many payments made during the period of employment certified on the Employment Certification form are qualifying monthly payments for PSLF. We will then notify you of the total number of qualifying payments you have made, and how many payments you must still make before you can qualify for PSLF.


Issue Two:  Research conducted by the Urban institute reveals that some public service jobs, which are eligible for PSLF status provide higher pay than similar jobs in the private sector.  

The PSLF program does not appear to be the most effective way to target people who are most in need of debt relief.

Issue Three:   There are many examples of people with substantial student debt would be unable to take a public service job without the PSLF.   Without the PSLF few new doctors with substantial medical school debt would be able to afford to work in a clinic that primarily served Medicaid patients.   Few lawyers with substantial debt would be able to work in the public defender’s office or for a clinic that provides legal services for the poor.

Issue Four:   The stipulation that loan forgiveness takes a full 120 payments creates job lock and prevents people from looking for private sector positions where they might be more productive and might learn more.

A Potential Improvement to PSLF:

The major problem with PSLF is that many enrollees will not receive the loan forgiveness that they expected to receive. These people enrollees may pay more over the life of their loan than borrowers with a fixed term student loan plan.   

Fixing PSLF requires the government provide some subsidy as soon as the enrollee is certified. My proposed plan has the following features.

·      Government pays all interest on the student loan for three years.

·      Student borrower pays 12.5 percent of income towards reduction of the outstanding loan balance.

·      After three years, the remaining loan balance is converted to a 10-year or 15-year fixed rate loan.

Concluding Thoughts:   It is a sign of how much our politics has changed that a loan forgiveness program enacted under George W. Bush is targeted for elimination by both House Republicans and the Trump Administration.    This is not the only student loan program targeted by Republicans and Trump. (The Republicans want to eliminate subsidized loans and are proposing major changes to income-driven replacement plans.)    

Student loan programs can and should be improved to target borrowers most in need and to minimize labor market distortions.   However, current Republican proposals basically eliminate rather than improve existing benefits. 

One area of the economy where the elimination of the PSLF may have a large effect is real estate.  The reduction in monthly payments from enrollment in Income Contingent Loan Programs and the loan forgiveness feature will help some people buy a home.   The elimination of PSLF will delay purchase of the first home for many.   

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