A lot of my clients depend on the Public Service Loan Forgiveness program (PSLF). They’re making life and career decisions based on it existing. After all, receiving tax free loan forgiveness after 10 years of income driven payments is pretty awesome. There’s been a veritable freak out online and on Twitter about the latest PSLF lawsuit involving several borrowers who were incorrectly told they were eligible for the PSLF program. However, a recent court ruling In February 2019 might make three of the four borrowers PSLF eligible after all. Anyone depending on the future of PSLF should feel good about these lawsuits and their results.
For most clients and readers, I don’t think you need to worry. The vast majority of PSLF borrowers clearly qualify as they’re government or 501c3 employees. I’m a student loan consultant, not an attorney, but I’ve advised more student debt than anyone in the country for what it’s worth. Here’s what the PSLF lawsuit actually means.
Why are People Suing the Dept of Education Over PSLF?
The freak out centers on a big group of lawyers being told wrongly that they were on track for loan forgiveness. The Dept of Education lets private companies handle the servicing and payment processing for student loans. The Dept gave PSLF servicing rights to a single private company called FedLoan Servicing.
Whenever someone tries to track their progress in the program, their loans get transferred to this servicer because of FedLoan’s PSLF monopoly granted to them by the government. Fed Loans sent out info for at least a couple years that some borrowers were eligible that actually weren’t eligible.
We can’t know for sure, but here’s how I think this situation happened:
- FedLoan issues approval letters to several borrowers from the American Bar Association, Vietnam Veterans of America, and other organizations in 2014 saying that they qualify. FedLoan is an authorized agent of the Department of Education.
- In the twilight of the Obama administration, the Dept of Ed reviews several PSLF cases more carefully as politicians realize the program will be far more expensive than they thought. Emails between FedLoan and Dept of Ed show rules made up on the fly (the Feb 2019 court ruling found that the Dept made rules about PSLF in an “arbitrary and capricious” manner in violation of the Administrative Procedure Act (APA). That basically means they didn’t give proper notice and follow standard rule making guidelines.
- FedLoan then issues rejection letters in 2016 when the borrowers had been approved previously. Judge Timothy J Kelly of the DC Circuit Court found that the original determination letters had language in them that seemed final, in contrast to the Department of Ed’s claim that it was provisional.
- Four borrowers affected by these couple years of lost credit decided to sue.
Who All is Included in the PSLF Lawsuit?
Obviously, the folks who spent a couple years or more in a job thinking they were working toward loan forgiveness are rightfully pissed off. The affected group is mostly lawyers working at the American Bar Association.
There are others in the lawsuit too who work for public interest and not for profit type names like the Vietnam Veterans of America (VVA). These borrowers argue that the Dept of Education committed to these individuals that they were eligible for PSLF and should restore the few years of eligibility they lost as a result of the Fed Loans mistake.
They also want their organizations listed as qualifying employers so that they don’t lose lawyers to other organizations. The Judge Kelly prioritized the claims of the individuals over the organizations. In other words, he told FedLoan to reconsider its rejection for three of the four borrowers because of the APA violation. The fourth borrower he found ineligible because the VVA didn’t provide direct services.
The Reason this PSLF Lawsuit is a Big Deal
The PSLF application has not been used by a massive number of people right now. The Employment Certification Form (ECF) is the primary way to track progress towards the 10 years needed for PSLF. If a group of borrowers were incorrectly told they had eligibility, everyone is worrying that no one can trust the private company Fed Loans to tell them accurate information.
If that’s the case, then nobody knows if the credit they’ve supposedly built up towards PSLF actually counts for anything. Since plenty of people are working in jobs solely for the PSLF benefit, that would alter people’s lives. So there is legitimate angst emanating from this lawsuit.
What the ruling of Judge Kelly says in my view is that borrowers will be protected aggressively. I think you could make a convincing case that their service did not qualify under the rules of PSLF. However, since it was a gray area, the Department of Education made rules willy nilly, and the initial finding was that they qualified, it looks like they’re being given benefit of the doubt.
What’s a PSLF Qualifying Employer?
So the first caveat is that you must be employed by a ‘qualifying employer.’ What’s that you ask?
Qualifying employment includes employment by the government, employment by a not-for-profit organization that is tax-exempt under Section 501(c)(3) of the Internal Revenue Code, AmeriCorps position, a Peace Corps position, or employment at a public service organization.
You must also make qualifying payments based on your income on Direct loans for 10 years while employed at this qualifying employer.
Here’s the first problem with the borrowers’ eligibility in the lawsuit. The American Bar Association is an industry specific membership organization that’s governed by Section 501(c)(6) of the IRS Code. That status means that the ABA is a ‘business league’ that’s allowed to engage in ‘unlimited lobbying’ for the economic benefit of its members. So the only way the ABA is a qualifying employer is if they’re considered a public service organization.
What about the borrower who worked for Vietnam Veterans of America? Surely that’s an eligible not for profit employer? Actually that organization is a 501(c)(19) under the IRS Code. The only way that employment qualifies for PSLF is if the VVA is a public service organization.
So the first rule from this PSLF lawsuit is check to see if your employer is a government or 501(c)(3) organization, or you could have trouble qualifying.
Of course, I’m no lawyer, and the Judge in the case seems to have suggested that the ABA lawyers time should count. Note that he didn’t say that the ABA qualified as a public service organization. He said that the severe impact on these borrowers’ finances and the screwups with the PSLF ECF process should force their cases to be reconsidered.
What is a Public Service Organization and What Does it Mean?
So we’ve established the only way these lawyers could have eligibility for PSLF is if they work for a public service organization. Here’s that definition from the ECF you need to submit to track PSLF progress:
A public service organization is a private not-for-profit organization that is not a labor union or a partisan political organization and that provides at least one of the following public services: (1) emergency management, (2) military service, (3) public safety, (4) law enforcement, (5) public interest legal services, (6) early childhood education, (7) public service for individuals with disabilities and the elderly, (8) public health, (9) public education, (10) public library services, (11) school library services, or (12) other school-based services.
So the only way the ABA and VVA lawyers can qualify is if their employers are not labor unions or partisan political organizations and if the work they do qualifies according to the PSLF definition of public interest legal services. Given that the ABA and VVA don’t seem to be labor unions or partisan organizations, let’s see if they fit the definition of public interest legal services.
Public interest legal services refers to legal services that are funded in whole or in part by a local, State, Federal, or Tribal government.
Judge Ruling Is a Mixed Bag for Who Qualifies for PSLF
Clearly, the Vietnam Veterans of America is not funded in whole or in part by a local, state, federal, or tribal government. The American Bar Association is also not funded by a government. Additionally, you could argue that the VVA is a lobbying organization for Vietnam veterans. That’s a worthy cause with a well deserving group of Americans, but it’s not technically public interest law.
Under PSLF rules, working at the VVA is more like lobbying for a worthy cause. The Judge seems to have ruled that way as the VVA doesn’t provide direct service but rather primarily advocacy.
The ABA is not technically a labor union, but it is a professional or trade organization that seeks to maximize the economic well being of lawyers. It does a lot of other good things too, but the government argues that it doesn’t matter in this case. From my interpretation, it seems like the ABA lawyers could qualify because they did qualifying work. However, the ABA organization itself will not be given PSLF status. Confusing isn’t it?
If the lawyers owe less than 1.5 times their income and do not plan to utilize PSLF, these borrowers would be better off refinancing their student loans and paying them back. Many have taken new jobs at clearly qualifying organizations because of the importance of this program for their lives.
FedLoan Just Messed Up by Telling Them the Wrong Thing
I think it’s clear from the spirit of the PSLF certification form that the individuals in the lawsuit did not qualify. The analogy I’d make is if someone at the IRS incorrectly processed my taxes.
It doesn’t mean the IRS can’t send me a correction and ask for more money. If a judge incorrectly says “not guilty” when the jury verdict reads “guilty,” it doesn’t mean I can’t get sentenced.
I get that to receive this notification years after you were wrongly notified you were eligible for PSLF is terrible. It’s why basically all of the loan servicers, not just Navient, are some of the worst organizations for customer service anywhere. Fed Loans really messed up badly.
However, the court ruling prioritized borrowers and said that a violation of laws and normal rule making procedures shouldn’t ruin somebody’s finances. That’s great news for everyone pursuing PSLF.
Also, anyone who had their PSLF service disqualified who worked at a non-501c3 non-profit organization should appeal the finding. This lawsuit allows others in similar situations to appeal their lack of qualifying PSLF credit because of the APA violation by the Department of Education.
How I Think this PSLF Error Happened
People are only human, no matter how detailed a procedures manual is. My bet is that some rep charged with making PSLF determinations at Fed Loans looked through these certification forms and saw a not for profit that didn’t have a clearly partisan or labor union name.
FedLoan also didn’t check to see how the organizations receive funds and how they aren’t government funded. So they just checked the box that the borrowers in the PSLF lawsuit were eligible. It’s no surprise to me, as FedLoan cost my wife thousands of dollars with their poor service.
The PSLF FedLoan Disaster as a Domino Effect
When the borrowers called in, the reps on the phone looked at the note on the profile that said “eligible,” and so they merely repeated the mistake their processing folks did.
Once that initial mistake happened, it snowballed as nobody at Fed Loan would overturn the previous ruling. Then outgoing officials at the Dept of Education wanted to do one final review of PSLF determinations made by Fed Loan before Trump’s people took over.
Why This PSLF Lawsuit Probably Doesn’t Affect You
Here’s the reason why you probably shouldn’t worry. If you’re going for PSLF, you’re almost certainly at a 501(c)(3) or a government employer. If you’re not at one of those kinds of employers, and aren’t at AmeriCorps or the PeaceCorps, you probably don’t qualify for PSLF. Most people going for PSLF are at qualifying organizations, and are thus unaffected by this PSLF lawsuit. Yes you probably can’t trust FedLoan servicing, but if you’ve interacted with student loan servicers much you probably already knew that.
If You’re at a Government or 501c3 Employer with Direct Loans You’re Good
So right now, if you are depending on PSLF, check your employer’s tax status. Ask HR for their financial docs and look and see if they’re a 501(c)(3). All I did to find out the ABA was a 501(c)(6) and the VVA was a 501(c)(19) is google their tax status.
Another clue is your retirement account. If you have a 403(b) or a 457, you’re probably eligible for PSLF. The American Bar Association has a 401(k), which is for corporate type employers. That’s a clue they’re not eligible for PSLF.
How to Protect Yourself Against Something Bad Happening to PSLF
The first step is to independently check if your employer is actually eligible. If you’re curious, ask in the comments below. Maybe we can crowd source it.
Next, don’t pay extra towards your loans if they might be forgiven. Instead, open an account with Vanguard if you don’t need advice or Betterment if you do. Then, invest what you would’ve used to pay extra on your student debt. Finally, save as much as you can in your retirement plans (currently $19,000 maximum in 2019 for employer plans or $6,000 for Traditional IRAs).
Make Sure Your Finances Can Withstand PSLF Going Away Just in Case
Plan on PSLF, prepare for it’s repeal just in case. Anybody with PSLF in the promissory note will probably qualify. The chief threat to PSLF could actually be a means test imposed by the President or Congress. That’s already been proposed by President Obama, although it got shot down by members of his own party.
The Republican Congress tried to repeal PSLF entirely, but only for new borrowers. That means grandfathering for PSLF borrowers is very likely going to occur long term. I think there’s over a 90% chance current borrowers will get to take advantage of PSLF in its current form, so you shouldn’t be super worried about this.
Want Help? Let’s Craft a Personalized Student Loan Strategy for You
So save a lot. Make a plan. Independently verify if you think you’re eligible for PSLF. The PSLF lawsuit luckily doesn’t have to affect you.
If you have six figures of student loans, don’t trust your financial future to a student loan servicer. That’s the big takeaway from the PSLF lawsuit for me.
Perhaps you’ve read all this and wondered how you might get competent help with your student loans. I provide student loan help for a flat fee, and I’ve consulted on hundreds of millions in student debt for clients. Just click the button above to get in contact with me.