A Cautionary Tale About Student Loan Forgiveness

  1. I've seen enough posts here about government-sponsored student loan forgiveness programs for working in places like Native American Reservations and critical access hospitals. The lawyers in this story were counting on student loan forgiveness after working for 10 years in a public service job. Years after they started, the government decided that their jobs didn't qualify after all. They're suing. Who knows what the outcome will be.

    Hundreds of thousands of people with piles of federal student loan debt had not been too concerned because they were counting on a federal government program that would forgive those loans if they worked at least 10 years in a public service job.

    But what happens if the definition of “public service” seemed to change midway through that decade?

    On Tuesday, the American Bar Association and four lawyers who thought they qualified filed suit against the Department of Education trying to answer that question. The department had informed several of them that their jobs would make them eligible for loan forgiveness, but they later received letters saying that the ruling had changed.

    All four, according to the legal brief, might have picked different jobs, borrowed less or entered different repayment plans had they known the rules would change.
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  2. 5 Comments

  3. by   NurseLauraM
    While I believe the PSLF program will not last much longer, I don't understand how it is legal for the DOE to change the terms of their agreement retroactively. If they are going to deem certain jobs ineligible for PSLF, they need to notify borrowers ahead of time and should count prior payments towards the 120 needed to qualify for forgiveness.

    When these lawyer's decided to work in public service, they were influenced by the potential loan forgiveness it would earn them (which is a LOT for a lawyer). In order to qualify for PSLF you need to be on an income-driven repayment (IDR) plan. Typically when one completes 20 years of IDR repayments the rest of their loan is forgiven, with one caveat: they have to count the amount forgiven as taxable income (this is often referred to as the "tax bomb"). Alternatively, with PSLF, the amount forgiven is not taxable. This can be a massive amount, especially for members of professions that require a costly education (e.g. lawyers, dentists, doctors, etc.). One way to avoid this "tax bomb" is of course to pay off the entire loan over a period (usually 10-30 years). The monthly payment is higher but you avoid any debt to the IRS at the end. These attorneys may have chosen a different payment plan, which they may have chosen a higher-paying job to finance (read: not in public service) had they not anticipated the PSLF relief. So these individuals signed up for IDR repayment plans expecting total relief in 10 years, and now instead they may have to make 25 years of payments on IDR (or something else if they switch, although public service jobs often don't pay enough to be able to afford a 10-year or even 20-year repayment plan) only to be hit with a tax bill close to six figures, which must be paid immediately and in full. Of course, they can claim insolvency but that's a whole other discussion and does not work for those who have accrued a lot of assets.

    There are a lot of people (including many in the current government) who believe that forgiveness programs like PSLF are overly generous and disproportionately benefit graduate borrowers. It is likely that PSLF may be capped or even eliminated in the near future. I cannot reasonably argue against such movements. Personal considerations aside, I don't believe it is fair to shift such major amounts of debt from the borrower to the taxpayer. However, when individuals have made major life decisions based on the promise of PSLF, and that promise was documented in writing by the DOE each year, I don't think it is justifiable to retroactively break the agreement.

    I hope they win the case.
  4. by   Not_A_Hat_Person
    The Department of Education is now claiming that student loan forgiveness offers are not binding, even years down the road.

    More than 550,000 people have signed up for a federal program that promises to repay their remaining student loans after they work 10 years in a public service job.

    But now, some of those workers are left to wonder if the government will hold up its end of the bargain — or leave them stuck with thousands of dollars in debt that they thought would be eliminated.

    In a legal filing submitted last week, the Education Department suggested 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 agency said.

    The filing adds to questions and concerns about the program just as the first potential beneficiaries reach the end of their 10-year commitment — and the clocks start ticking on the remainder of their debts.
  5. by   Orca
    That's a load of crap. A person makes a life-altering decision based upon information that is supposed to be reliable, only to be told later that it's "not binding and can be rescinded at any time"?
  6. by   elkpark
    I saw the article about this, and wondering if any nurses were going to get caught up in this (I hope not). Yikes! I hope they win the lawsuit ("they" being the attorneys who are suing, that is ...)
  7. by   CFrancine
    My loans weren't large enough to really make the program worth it IMO. But I'm glad I decided to just pay them off aggressively rather than counting on this. 10 years is a long time. I did make the most of nurse loan forgiveness for my perkins loan. That process was smooth and the hardest part was getting HR to fill out the paperwork.

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