PSLF - The Time Bomb Goes Off?


Long time readers of FPMD are familiar with the Public Service Loan Forgiveness (PSLF) program.  Since the beginning of this blog, I've been encouraging graduating medical students to consider signing up for PSLF if their residency institution is a qualifying employer.  Indeed, PSLF was literally the first post on FPMD.  The biggest challenge facing PSLF has always been the financial unsustainability of the program, sometimes likened to a ticking time bomb.  Well, last week it might have gone off, but not in the way you imagined...

Quick Review of PSLF

PSLF was established in 2007 as a way to encourage young people to go into public service professions.  The deal was simple - take a full-time job at a qualifying public service employer, make 120 payments (10-years) and the government will forgive any balance remaining at the end of that time.  The program had good intentions and generous benefits, perhaps too generous - the Consumer Financial Protection Bureau (CFPB) estimates that 25% of the nation's workforce qualifies for the program.  The program's wide coverage enticed many high-debt professionals with potential high future incomes (myself included) to sign up for the program.  For more on PSLF, check out my previous posts:

The Challenge of Forgiveness - It's all about the $$$

The challenge of PSLF has always been its financial unsustainability, best summarized in this American Enterprise Institute (AEI) article from September 2016 - The coming Public Service Loan Forgiveness bonanza.  Education and financial experts have puzzled for some time in how to eliminate or mitigate the impending negative budgetary effects of PSLF.  Indeed, several attempts have been made to modify the program to make it more financially sustainable including president Obama's failed 2015 budget proposal to cap PSLF forgiveness at $57,500.

What happened last week?

This past week, PSLF hit the business page of the New York Times - Student Loan Forgiveness Program Approval Letters May Be Invalid, Education Dept. Says.  The department of education submitted legal filings last week claiming that "borrowers could not rely on the program’s administrator to say accurately whether they qualify for debt forgiveness. The thousands of approval letters that have been sent by the administrator, FedLoan Servicing, are not binding and can be rescinded at any time."  The filing came in response to legal action by the American Bar Association and 4 lawyers last December.  So what are these lawyers suing about?

You see, as part of PSLF enrollment and tracking, applicant borrowers submit the PSLF Employment Certification Form (ECF) to Fedloan Servicing who then determines whether their employers fell under the definition of "public service organizations" and whether their payments counted/will count toward the 120 required for loan forgiveness. For these plaintiffs, they were told initially that they qualified for PSLF, only to have that qualification revoked at a later time without any explanation or appeal process.  To review these events:

  1. These lawyers signed up for PSLF and submitted ECFs which were approved by Fedloan.
  2. Later on, sometime years later, they are told that - "Oops, you don't qualify. Not only that, you never qualified to begin with."
  3. The Ed Dept's message to the borrower - "Tough luck, but you should have known better than trusting my word."

Murky Waters Ahead

If all that sounds ridiculous, then you are among friends here at FPMD.  Linda Klein, president of the American Bar Association, called the department’s response “illogical, untenable and bewildering" and I incline to agree.  Can you imagine a scenario where you hired someone to renovate your property and later refuse to pay them?  Oh wait...  Honestly, I anticipated that something will change as we near the eligibility date for PSLF.  But never did I expect the Ed Dept to simply revoke a borrower's eligibility retroactively.  Now the question is how will this shake out in court?  Luckily we have a bunch of ticked off lawyers on our side.  I will be carefully watching the developments in this case.  Because, like many of you, this affects me personally.  

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Future Proof, MD

Dr. Bo Liu is an aspiring radiologist-in-training and the founder and editor of the White Coat Money Blog.  He has an interest in interventional radiology and helping his medical colleagues get ahead in this mad world of medicine and money.  When he's not crushing the list at the PACS station or typing up your next favorite blog post, you can usually find him at the local badminton club, movie theater or the most recently opened restaurant.