The Department of Education made a huge announcement Wednesday. They confirmed that as of June 30, 2018, the Department has forgiven $5.52 million for 96 borrowers. The PSLF program gets people really worked up. Folks are scared it’s not going to happen, even though it’s extremely likely that it will. The announcement that almost 100 borrowers have legitimately had their loans discharged should be reason for rejoicing for the millions of people who hope to have their loans wiped away through this federal program.
However, if you look at the rest of the report, the statistics start looking grim. Over 28,000 borrowers applied for forgiveness, and only 96 succeeded. According to Federal Student Aid, an office of the Dept of Education, 70% of those applicants just flat out didn’t qualify because the requirements were clearly not met. The Dept couldn’t evaluate another 28% because the applications were not totally complete.
The remaining 2% were either approved or currently still being processed. Some borrowers submitted more than one application too. While this report might seem awful, stick around to the end to see why I’m so thrilled.
Why Are 99% of Borrowers Failing to Qualify for PSLF?
To understand why I’m not surprised that so many people are not getting approved for PSLF, you have to know the nuances of the student loan system. In 2007 when PSLF became law, almost no one knew how to take advantage of it. Direct loans were being issued in small quantities, and the Federal Family Education Loan Program (FFEL) was the typical loan most students used to fund their schooling.
Hence, the number of folks who had access to Direct loans in 2007 and 2008 was extremely limited. Only that group could be eligible for PSLF 10 years later. Those FFEL loans that most people used back then explicitly do not qualify for PSLF.
Recall that to get your loans forgiven tax-free with this program, you need to pay based on your income for 10 years while working full time at a qualifying employer.
I have no doubt that the 70% of applicants who outright failed to qualify didn’t understand that you had to have Direct loans, not FFEL loans, to receive PSLF. They tried for forgiveness hoping the government would make some exception since they fulfilled the spirit of the law but not the letter of the law.
While the Congress did pass a Temporary Expansion of the PSLF program, it only included money for borrowers who had Direct loans but used the wrong repayment program. It doesn’t help FFEL borrowers. If it did, that bill would’ve cost tens of billions of dollars.
Misunderstanding Around FFEL Loans and PSLF
I found this out the hard way when I discovered that my wife had some FFEL loans in 2012. Even though she had diligently paid on them while working at a not for profit hospital, none of her IBR credit qualified.
Many borrowers applying probably think that since they paid on IBR for 10 years at a not for profit, they should be good. Unfortunately, the rules are extremely clear that only Direct loans qualify.
Direct loans became the default method of borrowing in 2010 when the government totally took over the student loan market. To qualify for PSLF in 2020, you would have had to have known to consolidate all your FFEL loans from before 2010 into Direct loans immediately when you graduated. After all, you probably were in school for years before 2010 if you graduated in that year with debt.
For that reason, we’ll see a trickle of PSLF recipients until 2020 and a lot of failed applications. People will get upset, and many will point to the high failure rate as proof the system won’t work for others. Gradually though, after 2020 we’ll see a stream of forgiveness as more and more folks will have had Direct loans without having to have done anything special to qualify.
That means starting sometime in 2022 or 2023, the stream of PSLF recipients will begin to turn into a flood. Congress won’t pay attention to PSLF until it starts hitting them hard in appropriations meetings when they have to figure out how to pay for this unfunded mandate.
Until then, $5.52 million is a drop in the bucket. That’s like a single federally funded study for an endangered mole rate in Northeast Ohio (making this up, but you get the idea).
Why Are Borrowers’ Applications for PSLF Incomplete?
Many of the applications failed because the borrowers did not fill out all the necessary information. In my experience, one of the most common reasons the Employment Certification Forms for PSLF get denied is because of the employer not filling out their section correctly. Signatures are often missing, documentation of employment is not complete, or some box wasn’t checked when it should’ve been.
To practice filling out the necessary information, you should annually certify your qualifying employment with FedLoan Servicing. This will make sure you don’t make mistakes when you submit the forms when you finally become eligible.
No One Can Say PSLF Isn’t Happening Anymore
There’s tons of misinformation surrounding the PSLF program. People say you should just refinance, that the government won’t honor its word, Trump will make sure to repeal it, Democrats will take it away for high earners, and the IRS will tax you on it.
Like most things related to money, people have a bunch of negative emotions surrounding this program and thus you get a bunch of ridiculous view points driven more by ideology than what the promissory notes of the loans actually say.
There is a possibility that the PSLF program won’t work out as it exists today. That probability is low, and it declines for every year more borrowers successfully receive forgiveness (name one major federal program that got repealed in the past 40 years).
Why This PSLF Announcement Excites Me
What I’m personally excited about is that we now have a sample size of almost 100 people who had their loans actually forgiven tax-free. The collective amount of $5.52 million is tiny, but it’s real money that borrowers will never be asked for again.
If you read blogs like these, you’re not going to be in the 70% of borrowers who threw the Hail Mary hoping they qualified when they obviously did not.
You’re probably not going to be in the 28% of borrowers who didn’t fill out the application correctly.
You’re going to be in the couple percent of folks who know exactly what’s going on, and you’re going to benefit because you understand the rules of the program.
Please show this to your friends who keep telling you PSLF isn’t going to happen. They’re wrong because it’s already started.
What are your thoughts about the huge percent of borrowers who got denied? Do you think this proves anything about the PSLF program? Comment below!